Start-ups Teeter Along A Recruiting Tight Rope

Poaching talented developers, engineers and managers from established technology companies is not only a necessary part of building a start-up company. It can make the difference between success and failure. might not be where it is today if Jeff Bezos didn’t nab some key software engineers from Microsoft back in 1996. Meanwhile, Intel’s beginnings can be traced directly to mass defections from Fairchild Semiconductor.

But stealing employees from big companies can be a delicate issue, especially when those doing the stealing used to work at the company.

Tod Nielson, a former vice president at Microsoft, knows this well. And the former high-ranking executive who now leads Redmond- based Crossgain is attempting to walk along this recruiting tightrope. Nieldon, who earlier this week announced a $10 million funding round from Benchmark Capital and The Barksdale Group, has signed an anti-poaching agreement with his former employer. He said the deal is “a win-win” for his company and Microsoft.

“We won’t go after a Microsoft employee. But if they come to us, we will be happy to talk to them after they send an e-mail to their manager,” said Nielson, whose 45-person company includes about two dozen former Microsofties.

Other local companies with ties to the software giant are doing the same on an informal basis, including digiMine and Ingition Copr.

Usama Fayyad, who spent five years at Microsoft in senior research positions before founding digiMine in March, said he is well aware of the issue.

“When we get approached by people from Microsoft, I often go back to their (human resources department) and say, ‘What is going on here? You are about to lose this guy, why aren’t you working to keep him?’” Fayyad said. “In some cases they succeed and some cases they fail. Of course, when they fail, I love to hire that person.”

It is an interesting balance for entrepreneurs like Fayyad and Nielson. After all, they don’t want to step on the toes of their one-time employer (a place that made many of them multimillionaires). At the same time, they realize that Microsoft has one of the greatest concentrations of technical talent in the world.

Yogen Dalal, a venture capitalist at the Mayfield Fund in Silicon Valley, said agreements like the one signed between Microsoft and Crossgain are commonplace in the technology industry. But entrepreneurs, he says, must be careful when establishing these arrangements. “It is a fine line and, (as) with everything, there is no book you can follow,” said Dalal, who recently led a $20 million round of financing in Kirkland-based digiMine. “Most people that leave Microsoft realize that it is a big empire and that it can really help these start-up companies. So they don’t want to shoot themselves in the foot by crossing their former employers.”

Microsoft spokesman Dan Leach said it is not a big issue, citing the company’s low turnover rate. There is no set policy for dealing with former employees who are creating start-ups, he said. He could not think of any legal action the company has ever taken to stop a former employee from recruiting Microsoft talent.

Still, former Microsoft employees who go on to found start-ups and the venture capitalists who fund them are cognizant of the potential conflict.

Greg Gottesman, a managing director at Madrona Venture Group in Seattle, said he took extra precaution with one of his start-ups that had been founded by former Microsoft employees.

“If we were going to recruit out of Microsoft, we wanted some very good legal advice,” Gottesman said.

Will Glasgow, also a managing director at Madrona, said big corporations sometimes feel threatened by the loss of key employees. That causes them to flex their muscles. But for the most part he says large companies cannot stop the recruiting process, one that he says stretches back to start-ups raiding Silicon Valley companies like Hewlett-Packard and Apple.

“We repealed the 13th Amendment a long time ago – repealing slavery – and people are free to pursue what they want to pursue and if other people want to join them that workd out pretty well,” Giasgow said. “I don’t think you see a lot of heavy-handed stuff as a general matter.”

Tom Alberg, an early investor in and, agrees. “Seattle is not as cutthroat on this as Silicon Valley in some ways.”

YottaYotta wins Canadian award

Kirkland-based YottaYotta Inc., an Internet storage company that last month raised $17 million in venture capital financing, received the “Investors’ Choice Award” at the recent Banff Venture Forum in Canada.

The company beat out 25 other technology companies for the top spot during the two-day event, which included more than 150 representatives from Asian and North American venture capital firms and investment banks. YottaYotta takes its name from yottabyte, the equivelant of 1 trillion terabytes of data. Investors in the company include Davenport Capital Ventures, Optical Capital Group, Grosvenor Venture Partners, Morgan Keegan and TechnoCap.

By: John Cook



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