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Williams' CTO Profits From His Position

Light Reading
News Analysis
Light Reading
4/27/2000

Matthew W. Bross is set to become a very rich man after Optical Network Corp.'s upcoming IPO. A very rich man.

He owns 322,460 shares of ONI's stock.

On the face of it, there's nothing odd about that. After all, Bross serves part time as a director on the board of ONI http://www.onisystems.com. What makes his good fortune noteworthy, however, is the fact that he is also a senior vice president and the chief technology officer at Williams Communications Inc. http://www.williamscommunications.com - which is one of ONI's customers.

And this is not the first time that Bross has benefited from shares offered to him by a supplier.

While it is becoming increasingly common for startups to compensate individuals at service providers with stock options or directed shares, Bross's package has attracted attention because of the sheer size of the warrant - large enough, in fact, that he is listed in the latest S1 filed by ONI with the SEC this week. According to the document, Bross owns 142,460 shares of Series G preferred stock and 180,000 shares of common stock - about 0.3 percent of the company.

"Issuing options to a company isn't unusual. But issuing that much stock to an individual sounds on the edge," comments H. Thomas Carter, an electronic commerce research analyst at U.S. Bancorp Piper Jaffray http://www.ecinvestor.com.

Others put it more strongly. "Whoa! What? Jesus Christ! That's just wrong. How much money can he possibly need?" exclaims the marketing executive at a networking startup when told about the deal.

The practice of issuing stock to individuals raises obvious ethical questions.

"The issue is objectivity. If there's a grant of beneficial interest, can the beneficiary maintain their objectivity in their procurement decision? Getting 300,000 shares of a venture-backed company would make it relatively difficult to make an unbiased decision," says Carter of U.S. Bancorp.

That might be putting it mildly. ONI has the potential to be one of the hottest IPOs this year (see ONI Strikes Back ). Assuming a first day pop of, say $80 dollars, Bross stands to walk away at the end of the first day's trading with almost $26 million.

Then again, Bross may not need the money as much as most people. That's because he is rumored to have accepted pre-IPO shares from vendors on at least two other occasions. According to Light Reading sources, Bross also received shares from Corvis Corp. http://www.corvis.com, an equipment manufacturer that two weeks ago announced it had signed an agreement with Williams with a "potential value of $200 million" (see Williams Spends $200 Million on Corvis Equipment).

And according to a Sycamore spokesperson, Bross also received "a nominal amount of directed shares" from Sycamore. Williams is Sycamore's biggest customer.

Networking companies that already have gone public say that the practice of issuing options and directed shares is having an impact on their business. "I'd guess that pre-IPO stock grants figure in well over half the deals we lose to startups these days," says a senior executive at a major networking company, who spoke on condition of anonymity. "I suspect that one day there will be investigations into this by the SEC, DoJ, Congress, and so on, but right now everybody's making too much money for much outrage to fuel such investigations," the executive adds.

Bross and Corvis did not return phone calls.

by Stephen Saunders, US editor, Light Reading http://www.lightreading.com

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