EBay Inc. founder Pierre Omidyar and his first full-time employee, Jeffrey Skoll, recently turned over stock now worth almost $2.4 billion to repay loans of only $1.5 million. In the unusual math of Internet-company finance, though, the steep price of the loan was probably worth every penny.
In June 1997, when the Internet auction site was in its infancy, the executives each pledged 6.9 million shares as collateral for two $750,000 loans from Benchmark Capital, a Silicon Valley venture-capital investor. The stock wasn't yet publicly traded, and the shares were valued at 11 cents apiece.
Benchmark in January exercised a clause in the loan contract that let it collect the collateral as payment, getting almost 13.8 million shares that today are worth $171.75 apiece -- for a total of more than 1,500 times the loan amount.
Even so, Omidyar and Skoll might not be billionaires today if they hadn't gotten the Benchmark loans. "While it was a good investment for us, it was an even better decision on their part," said Robert Kagle, a Benchmark founder and an eBay director.
Without the 1997 loans, eBay's founders might have sold the company for $50 million to one of several newspaper chains, Kagle said. The loans gave Omidyar and Skoll enough liquidity to let them continue running eBay as an independent concern. Now that it's the largest auction site on the Internet, eBay commands a market value of about $20.7 billion, based on today's share prices.
Omidyar, the company's chairman, now holds a stake worth almost $6.5 billion, even after giving up the stock pledged as loan collateral. And Skoll, now vice president of strategic planning, owns more than $3.9 billion of company stock, according to an April 1 company filing with the Securities and Exchange Commission.
Menlo Park, Calif.-based Benchmark also benefited. A $5 million investment in eBay, including the loans, grew to be worth about $4 billion, Kagle said.
The loan arrangement underscores the tensions that can exist between venture-capital firms and companies in which they invest. The unusual loan terms suggest Benchmark extracted a steep price in return for providing cash, said one outside expert.
"It's not typical that the lender can reach in and take the stuff pledged" as collateral unless the borrower defaults, said Ian Berman, managing director of Frost & Berman Inc., a San Francisco-based investment bank that specializes in entertainment and education software. "That kind of structure sounds like really twisting somebody's arm to get a loan."
Venture-capital firms argue that their profits compensate for the risks of investing in unproven companies that more often go broke than go public. In general, venture-capital firms provide the initial financing that many small businesses need to grow and subsequently attract public investors.
"The ground is littered with ventures that haven't gone as well" as eBay, said Bill Glynn of Southeast Interactive Technology Funds, a Durham, N.C., venture-capital fund.
Benchmark not only provided capital to eBay but also recruited some of the company's top officers, Kagle said. The venture-capital firm brought in Margaret Whitman as chief executive, Brian Swette as vice president of marketing and Howard Schultz, the founder of Starbucks Corp., as a director.
Kagle is one of six venture-capital experts who came together in 1994 to form Benchmark. The firm, whose outside experts include Reed E. Hundt, former chairman of the Federal Communications Commission, seeks to invest in markets such as consumer devices, semiconductors, networking equipment and electronic commerce.
Benchmark at the time of eBay's IPO held a 22.1 percent stake of 8.79 million common shares, including the stock pledged as collateral for the loans. The venture-capital firm has since distributed about one-third of the eBay stake to its investors.
Benchmark exercised its right to collect the collateral under the loan agreements on Jan. 12, when the shares had a market value of $1.1 billion. EBay's shares have more than doubled since that time.
An eBay spokeswoman declined comment on the loans and the collateral. At the least, it's possible Omidyar -- who started eBay to help his fiancee collect and trade Pez candy dispensers over the Internet -- didn't fully recognize his idea's potential.
"I don't think they ever imagined the company was going to be this successful," said Joseph Tzeng, managing director at Crystal Internet Venture Fund.