Crossgain Vs. Microsoft: "Mooning The Giant"

The startup found Bill Gates & Co. still gives no quarter

It's a short trip between love and hate. Just ask Tod Nielsen. A year ago, he was a trusted employee at Microsoft Corp. Chairman William H. Gates III had such faith in the young vice-president that he pulled him aside and asked him to go to Washington, D.C., to be his eyes and ears at the landmark antitrust trial. There, even in the face of mounting evidence of anticompetitive behavior, Nielsen insisted that Microsoft was not the bully the government portrayed. These days, Gates and Nielsen talk only through lawyers, and Nielsen knows firsthand about Microsoft's strong-arm tactics.

It all started last fall when Nielsen, who had left Microsoft, became CEO of Crossgain Corp., a business launched by Microsoft alumnae in February, 2000. The startup's aim: to create a service that runs a company's big software programs over the Web. Despite Crossgain's roots, its top execs chose to develop their service using products from Microsoft rivals Sun Microsystems Inc. and Oracle Corp. That was one in a series of decisions that snubbed the software giant. By Jan. 15, Crossgain's employees were in Microsoft's crosshairs, accused of violating noncompete restrictions contained in their employment agreements with Microsoft. Nielsen and 22 of his compadres felt they had little choice but to fire themselves--wiping out 28% of Crossgain's workforce. They plan to trickle back to Crossgain when their yearlong noncompete restrictions expire.

How did it come to this? Crossgain officials decline to comment. Microsoft insists it was just sticking by its rights. "We felt like we had good-faith discussions with Crossgain to resolve the conflicts in the noncompete agreements. We find it both surprising and regrettable that Crossgain abandoned those discussions," says a spokesperson. Inside sources at both companies, however, say that Microsoft tried to use the issue in an attempt to force Crossgain to build its service on Microsoft software. This tale, pieced together from two dozen interviews with execs at both companies and outsiders who declined to be identified, shows that even while Microsoft is under the microscope of its antitrust case, it's willing to go to great lengths to muscle an adversary. The fact that Crossgain's founders were prodigal sons didn't help them one iota.

KEY PLAYER. For Nielsen, the decision to leave Microsoft after 12 years--most recently as head of developer relations--had been excruciating. He broke down and cried last June when he told Microsoft President Steven A. Ballmer that he needed a break from work. In September, he joined Crossgain because he saw it as a key player in the next generation of Internet computing.

There's a saying in techdom about Microsoft: Don't moon the giant. Crossgain mooned Microsoft every which way. First, the ex-Microsofties poached some of their former colleagues to join them at the startup. Then they raised $10 million from investors, including The Barksdale Group, a venture firm run by Microsoft's chief nemesis at the antitrust trial, former Netscape Communications Corp. CEO James Barksdale. A few months later, Crossgain named Mitchell Kertzman, an outspoken critic of Microsoft's business practices, a director. Kertzman is CEO of Liberate Technologies, an interactive-TV software maker that competes fiercely with Microsoft interactive-TV technology.

The last straw was Crossgain's decision to base its technology on non-Microsoft software. Instead of using such Microsoft products as the Windows 2000 operating system and SQL Server 2000 database package to develop its service, Crossgain opted for software made by rivals. "It doesn't look very good for Microsoft if a company run by its former vice-president of developer relations is using software made by Oracle," says a former Microsoft executive.

At first it seemed like war could be avoided. Last September, Nielsen heard from Senior Vice-President Paul Flessner, who runs Microsoft's SQL Server database-software business. Flessner and Nielsen were frequent lunch partners during Nielsen's days in Redmond. So when Flessner said he was concerned that Crossgain was in contact with Microsoft customers, Nielsen hopped in his Ford Explorer and drove a mile up the road to meet Flessner in his office. He laid out Crossgain's business plans, arguing that Microsoft had nothing to fear from the nascent company.

Weeks went by. A few days before Thanksgiving, Flessner, via e-mail, accused Crossgain of competing directly with Microsoft. And he alleged that the staffers Crossgain hired from Microsoft had violated their Microsoft employment agreements. Nielsen, Crossgain founders Adam Bosworth and Rod Chavez, and other ex-Microsofties were dumbfounded. They couldn't understand how they competed, since Microsoft didn't have a service to run software applications over the Web. And they couldn't fathom how Microsoft, a company they worked so hard for, could be so punitive.

The fight got messier. Nielsen and Flessner met three more times in Redmond in December. Nielsen was accompanied by Bosworth and company lawyers. Flessner matched him, flanked by Microsoft attorneys. Flessner said that Crossgain competed because its technology would allow users to exchange data over the Internet. To Crossgain, that definition of competition was overly broad. And some legal experts agree. "Courts aren't going to expand the circle of competition beyond real serious competition," says Peter M. Panken, an employment law specialist at Epstein, Becker & Green in New York.

With a potential lawsuit looming, Microsoft offered a deal, according to Crossgain and Microsoft. If Crossgain committed to building its service with Microsoft products, the company wouldn't pursue the noncompete claims. Crossgain sources say Microsoft specifically wanted to preclude the company from using Oracle database software. Microsoft sources deny that. Switching to Microsoft technologies meant huge delays and the loss of months of work for Crossgain, which hopes to launch its first service in March. But the deal also meant avoiding months, or perhaps years, of litigation with one of the wealthiest companies in the world. Crossgain execs thought they could win the litigation, but the time and expense to do it would be a huge drain.

As the negotiations continued, Crossgain enlisted a handful of former Microsoft executives to help make their case with Ballmer and other big brass. But Microsoft didn't back down. "Steve [Ballmer] takes a strong point of view. He feels people who sign employment agreements should live up to them," says an exec familiar with the talks.

"CHARGED UP." So Crossgain considered the offer. The company entered into a three-week agreement with Microsoft, beginning Jan. 1, in which it would test Microsoft's software. After two weeks, though, Crossgain concluded that it would be more trouble than it was worth. Crossgain execs believed that by firing the 23 employees, they could remove Microsoft's most potent argument if it sues. Crossgain decided that the right to choose its software was worth the fight. "The Crossgain guys were saying, `Give me liberty or give me death,"' says an executive.

They got purgatory. At a meeting of the company's 80 employees, Nielsen told the staff about a section in James C. Collins' business management book Built to Last: Successful Habits of Visionary Companies. Every successful company, Collins writes, has to overcome a challenging episode early in its life. This, said Nielsen, was Crossgain's episode. "The remaining folks were charged up," says one worker. Nielsen, Bosworth, and the other Microsoft alums cleaned out their desks, handed off their tasks, and walked out the door.

What happens next is unclear. Bosworth can return to Crossgain next month. Nielsen can come back in July. With more than a quarter of its workforce gone, though, Crossgain is likely to lose valuable time getting its product to market. Meanwhile, Microsoft could still sue, claiming that Crossgain's technology is based on the work of former Microsoft employees who violated noncompete agreements. Microsoft won't disclose its plans.

One thing is certain: Anyone who thought the software giant mellowed with the antitrust trial should think again. Since the antitrust case began, Microsoft has gone to great lengths to shed its image as a corporate bully. But as the Crossgain struggle shows, hardball is part of Microsoft's DNA.

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