As America Online prepares to complete its acquisition of Netscape, insiders are betting that the deal's silver lining will insulate Netscape from an employee exodus.
AOL took immediate measures to retain Netscape employees after announcing the merger, which involves a strategic alliance with Sun Microsystems, promising an extra month's salary to anyone who stayed on through the close of the deal.
Now that the Justice Department (DOJ) has approved the acquisition, all that remains is for Netscape shareholders to do the same. They are scheduled to vote tomorrow.
From the announcement of the acquisition, observers have questioned whether AOL's corporate culture was compatible with Netscape's; some predicted a mass exodus. But while some Netscape employees balked at the prospect of life under AOL and many have been lured away by lucrative start-up opportunities, AOL and Netscape have managed to stem the tide of departing workers, largely with rising stock prices that make employees' options hard to give up.
Assuming Netscape shareholders approve the deal, as they are expected to, AOL's temporary cash incentive to stay will expire. But another retention incentive will have taken its place, as Netscape employees become AOL shareholders. Under the terms of the deal, Netscape shareholders will receive .9 shares of AOL stock for every Netscape share they own. AOL's stock was trading at an all-time high of 105.13 in midday trading today.
Netscape shares also were breaking records, trading at 94.31 this afternoon.
For many Netscape employees, the prospect of owning AOL's high-flying stock represents a very tight pair of golden handcuffs. Netscape repriced its stock options a year ago in an effort to retain employees. The company's stock was trading near its 52-week low, putting many employees' options "under water." That meant the option strike price was higher than the stock's market value, making the options worthless to employees.
As a result of the repricing, many Netscape employees hold options with strike prices of about 16 per share. The company continues to grant options to new and existing employees. A recent round of "performance options" was granted to a targeted group over the past three weeks. Netscape said those options were given to recognize the performance of certain employees, rather than in an effort to retain them in anticipation of the AOL acquisition.
In addition to the financial incentive, Netscape insiders point to another important benefit of working under AOL: suddenly, Netscape will no longer be Microsoft's punching bag.
"For someone who stays now, there is partly an emotional reason," said one Netscape employee who recently left the firm. "After being battered all the time by Microsoft you're now working for someone who has this huge war chest.
"Lots of people will stay for the pleasure of working on deals where you're not starting with one hand tied behind your back with Microsoft's 12-gauge shotgun pointed at you. It was a lot easier for Microsoft to stomp on Netscape than it will be to stomp on AOL," the former employee added.
Still, many at Netscape are taking a wait-and-see attitude about the merger.
"Few of us thought of leaving because of the stay bonus," said one Netscape engineer. "Now I think we'll take the next three to six months to see how the Sun-AOL-Netscape relationship works out and then make a decision to stay or go."
Netscape's retention problem not unique
By the accounts of many current and former Netscape employees, the company's biggest retention headache is the same one faced by firms throughout Silicon Valley: an excruciatingly tight labor market for software engineers and the growth of new start-ups that have the potential to make founding members far wealthier and more influential than they are likely to ever be under the massive establishment of AOL.
"Stock options are a major reason people will stay at Netscape," conceded one employee who left recently. "But at a start-up, from an equity standpoint there's a whole lot more upside than AOL or Netscape can offer you."
Indeed, start-ups throughout Silicon Valley are liberally peppered with former Netscape employees, or NetEscapees, as they refer to themselves. The Netscape refugees have formed an online yearbook of sorts at ex-mozilla.org (a reference to Netscape's dragon-dinosaur mascot), where snapshots of start-up life abound.
Exacerbating the threat to Netscape's labor pool in some cases is the fact that a number of these new firms were founded by NetEscapees, including e-commerce firms Tellme.com and Accept.com, and customer service email provider Responsys.com.
Dipping into the company pool
For those who start these ventures, returning to Netscape to lure more talent away is tempting, but it can be a tricky proposition.
As first reported by CNET News.com, former Netscape vice president Daniel Shader left Netscape to found Accept.com, formerly known as Emptor. For Shader, who at some point might want to do business with his former employer, Netscape's talent pool is strictly off-limits.
"We don't call into Netscape, and we don't recruit out of Netscape," Shader said. "We have only one employee from Netscape, and he aggressively pursued us. I have great relationships at Netscape and would love to work with the people over there again. Meanwhile, it's a long life in a small valley."
What's more, Shader has a promise to keep.
"When I left Netscape I had a conversation with the folks there, telling them I was going on to go do this thing, and I told them I'm not going to raid out of Netscape," Shader said. "I gave them my personal word on that."
For other NetEscapee recruiters, staying away from the Netscape labor cookie jar is more a matter of contract than diplomacy.
Eric Stutzman, formerly with Netscape human resources, now recruits for Chemdex, a Kleiner Perkins Caufield & Byers-backed e-commerce firm that launched in 1997. Stutzman said that upon leaving Netscape, he signed an agreement not to recruit from the firm, but that the agreement expired after one year.
Now Stutzman works with no less than three other former Netscape recruiters, who have brought four more NetEscapees on board at Chemdex for a total of eight. That's one-tenth of the company's labor force.
Stutzman described the AOL deal as a plus for recruiters.
"For the types of positions I'm recruiting for, I can offer people something that Netscape can't any longer--a 'first mover' role," Stutzman said. "Meanwhile, Netscape is being folded into this huge company--they're moving back into the cave. Early on, Netscape was about thinking outside of the box, not being in a proprietary environment. Now Netscape is moving backwards and becoming one of 'them.'"
NetEscapee-founded firms are not the only ones luring talent away from Netscape's Mountain View campus. One firm Netscape insiders say has been particularly aggressive in targeting the Netscape payroll is Mayfield-backed start-up Geocast, described by Mayfield as a firm providing "wireless broadband networks for the Internet." Geocast did not return calls seeking comment.
Netscape asserts that its attrition rate is no worse than it has been in the past, and that it is significantly below that of other Silicon Valley companies.
"The Valley average is about 25 percent," said Rosanne Siino, Netscape vice president of corporate communications. "We have been hovering around the 17 to 19 percent range over the last six months, and that hasn't seemed to change in the last few months."