Software company takes advantage of IPO loophole

First, insiders at Salesforce.com sold their shares privately. Then, the company filed to go public.

May 21, 2004 9:01 a.m. PT

3 min read

The right of investors to know when corporate insiders sell stock, and at what price, is a fundamental part of American securities law.

When it turned out that Ken Lay, the former chairman of Enron, was using a loophole to sell shares secretly while he urged others to buy, Congress quickly changed the law.

But one loophole remains, and it is being used by Salesforce.com, a software company about to go public.

At first glance, this offering shows no selling of shares by insiders. But an investor who adds and compares numbers on different pages of the prospectus discovers that insiders have disposed of millions of shares since they bought them in 1999 and 2000. Were they sold years ago, or weeks ago? At what price? The prospectus has no answers.

When I asked Marc Benioff, the chief executive, what he did with the shares he used to own, he replied in an e-mail message that Securities and Exchange Commission rules barred him from talking. But no rules bar the company from amending its prospectus to give the facts.

Salesforce.com leases software to corporate customers that lets them share data on their customers within different parts of the company. The customers get access to the software and their data through the Internet.

The company spends little on research and development: 7 percent of revenue in the most recent year. It spends a lot more on marketing: 57 percent of revenue. The cost of actually providing its service to customers is only 18 percent of revenue. If it could ever slash marketing costs, it might be very profitable.



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When the company was founded in 1999, as the Internet bubble was expanding, the owners never thought they would have to wait this long to go public. In starting a company foundation, to which insiders have donated 221,030 shares, Salesforce.com gave it warrants whose terms assumed a successful public offering by early 2002 at the latest.

Then the bubble burst and the rules changed. Suddenly investors wanted profits.

Salesforce.com changed, too. In 2001 it walked away from a lease on expensive office space in San Francisco, recording a $7.7 million hit to earnings. In the fiscal year that began in February 2002, it cut back on advertising, but continued to hire salespeople. Benioff's salary for that year and the next was just $1, with no bonus or options.

It worked. The company reported a $3.5 million profit in the year that ended this January, and it promptly filed to sell shares. That profit would have almost vanished had a recovering office market not allowed it to reverse part of that rental charge, and it would have vanished entirely had Benioff made a more normal salary. (The company does not say what he received before the bubble burst.)

But it was a profit, and with technology shares having recovered, the company hopes to get $7.50 to $8.50 a share, valuing it at as much as $868 million, or 10 times its revenue in the last year. Such a price would seem to assume continued rapid growth and the ability to sell to large companies that have so far resisted its salespeople.

Given his $1 salary, one might think some stock sales by Benioff were necessary. A man does have to eat. But he has claimed he made more than $10 million as an early investor in Siebel Systems and more than that off options at Oracle, where he used to work. Even after deducting the $2.5 million he invested in Salesforce.com, that would seem to have left enough money to pay bills.

If he sold shares, as opposed to giving them all away, that would indicate that he found the price attractive. But he won't say how many he sold, or when, or for how much.

That information is clearly relevant. The SEC should change its rules to make companies going public disclose the details of such insider selling.