To Cash Out? Or Not To Cash Out? That's the dilemma facing CEOs of hot dot-coms. Some don't worry about it.
By Mark Gimein

(FORTUNE Magazine) – In the annals of Internet shamelessNess, there are few more egregious examples of Net moguls scrambling to make a quick buck at the expense of ordinary investors than that of Philip Kives, the longtime chairman of a company called K-tel.

If you have a tendency to insomnia, you undoubtedly know about K-tel's music compilations, sold with a dreary urgency in late-night commercials. If you have been following the gyrations of Net stocks, you probably also know about K-tel. In April 1998, K-tel began pumping out press releases announcing that it had, yes, an Internet strategy. Speculators bit, even though putting up a Website and hiring some brand-name tech consultants hardly turned K-tel into an Internet leader. Investors bid the stock, which had been languishing below $10 a share for years, up into the stratosphere. Kives started selling. In fact, according to Thompson Financial Data, in the space of 30 days (from May 11 to June 9), Kives sold 68 separate blocks of stock in the company, stopping only after the share price had dipped back near the single digits. By the time he was done, he had unloaded $41 million worth of stock. K-tel now faces a shareholder class-action suit charging that Kives and other executives withheld information about the company's financial condition.

You don't need a finely tuned moral compass to conclude that Kives did something wrong. (Kives did not return FORTUNE's phone calls to explain why he sold so much stock.) Even Silicon Valley scorned Kives' behavior: Pumping up your stock with press releases and watching speculators bid it sky-high has become known as "the K-tel effect."

But the issue of whether investors are being taken advantage of by Net moguls itching to cash out is not usually so cut-and-dried. On the contrary: This may well be the grayest of gray areas when it comes to dot-com ethics. There are plenty of Internet founders who are enormously wealthy on paper but have converted few of their shares into cash. A good example is Amazon's Jeff Bezos. Though his 35% stake in has made him a paper multibillionaire, he has only sold some $25 million of stock. The rest of his wealth remains in company stock. Bezos held on to his shares even while Amazon's stock rose as high as $113 a share and fell as low as $41 in the past year. Bezos' net worth has been sliced by more than $5 billion since Amazon fell from its recent highs to its current price of around $65 a share. Surely, the fact that he continues to hold on to his stock even in bad times sends a powerful message to investors that he--and Amazon--are in it for the long haul. That's the same message that billionaires like Michael Dell and Bill Gates and Warren Buffett have been sending investors for years, and it's the kind of message that can be especially powerful in a highly volatile market like this one.

Now let's take a look at another Seattle-area multimillionaire, Naveen Jain. Jain is the 40-year-old founder and CEO of InfoSpace, a 300-employee firm that licenses commodity content like phone directories and shopping guides to Websites and wireless providers. It's not a sexy business, but wireless is a sexy niche these days, and investors have pushed the stock way, way up; InfoSpace stock now trades at around $230, after going public a year ago at a split-adjusted opening price of $3.75. With $38 million in revenues, it sports a market cap of $22 billion.

Unlike Bezos, however, Jain has not been shy about selling his stock. Indeed, less than five months after the company's IPO, Jain sold 3,010,000 shares. His take? About $203,555,000. That's right: more than $200 million. The shares he sold added up to more than a quarter of Jain's holdings, reducing his ownership from about 48% of the company to 34%.

Jain's decision to sell three million shares might not rank with Kives' pump-and-dump tactics. But it's troubling just the same. First, there's the speed with which he dumped his stock. Normally, investment bankers insist that founders not sell for at least six months after an IPO--quite often this holding period is a year--precisely to show investors that the founders believe in the company. But Jain's bankers let him jump the gun, and released part of his holdings from the usual six-month waiting period. What kind of message does that send? Second, it really does convey the appearance that he's cashing in. Yes, he still owns a third of the company, but $200 million is a lot of money. Even if (heaven forbid) InfoSpace should go down the tubes, Jain will walk away a very rich man. At the very least, his mammoth sale of stock gives the appearance that he is taking care of himself before he's taking care of his shareholders.

Not surprisingly, Jain disagrees with this assessment. Asked in an e-mail exchange how investors should react to big stock sales like his own, Jain wrote, "I think it depends on whether you believe that the founder believes in his company. Our investors know that I still own a large percentage of the company, and they know I am committed to our long-term success."

Give him this: At least Jain is willing to talk about these sensitive questions. Not so Pierre Omidyar, the founder and chairman of eBay. Omidyar sold about $187 million of his eBay stock in the company's secondary offering last April. (Chief Executive Meg Whitman sold about $50 million of stock at the same time, less than a year after joining the company.) If you feel like asking why, try calling eBay's communications department. They have a response prepared for questions like this: "While eBay executives will sell stock periodically, they are committed to the long-term growth strategy of the company." That's helpful, isn't it?

Jain argues that InfoSpace has proven its business model over several quarters, and that companies like InfoSpace have enough of a track record that their stellar rises in stock prices cannot be dismissed as smoke and mirrors. He says that investors have "gotten over the concept of a Net bubble." According to Jain's view, then, a founder selling stock in a hot Net company is just accepting the rewards of years of sacrifice. That's no different from any other executive getting rewarded for hard work.

But isn't it different? Whether the market for Net stocks is a bubble or not, companies are supposed to be built for the long haul. Traditionally, investors benefit when management (founders included) is rewarded for long-term performance, not for a short-term run-up. Brick-and-mortar CEOs can reap tremendous gains from options--but only after years of creating value for investors. It's hard to see why the payoff should come so much sooner for Net execs. When founders make huge stock sales, they are strongly suggesting that they are in it to get rich quick.

It seems almost bad manners, in the age of insta-wealth, to spoil the party and complain. InfoSpace, after all, has continued to rise. In fact, its stock has risen eightfold in the mere nine months since Jain sold his shares. eBay hasn't fared quite as well, dropping a bit from the $164 at which Omidyar sold his shares. But in the world of Net stocks it could regain that in a day. Hardly any cause for alarm, right?

So consider instead the case of Michael Egan, the chairman of Perchance you recall's eye-popping December 1998 IPO--the stock opened at ten times its offering price. But it soon began tumbling, and by April 1999 the shares were in free fall. In May, despite the falling stock price, was able to complete a secondary stock offering. And what did Egan do? He sold more than 2.5 million of his eight million shares, at $20 each. The stock today trades for around $8 a share. Which means that $30 million has effectively gone from investors' wallets into Egan's own.

Looks a little different when the stock's going down, doesn't it? No. It looks a lot different.

--Mark Gimein