You scratch mine, I'll scratch yours.

Matthew Bross is a big backer of

ONI Systems

, a small San Jose, Calif.-based optical network-equipment maker that is set to go public Tuesday. So is network operator

Williams Communications

(WCG) - Get Report

, Bross' employer.

So when ONI shares debut on


under the symbol ONIS, Bross and his boss will be handsomely rewarded for their support -- to the tune of some $40 million. The catch? Williams was ONI's largest customer last quarter, and Bross is Williams' chief technology officer.

With such gains at stake, some observers are questioning whether investment decisions could be coloring product moves. Though entirely legal, swapping contracts or product endorsements for IPO stakes can raise credibility questions, at least one investor says. Yet start-up companies in the hot optical sector continue to seek out these deals, because one good endorsement can essentially gild an IPO.

Youth Will Be Served

ONI is less than 3 years old and sells one product. It lists five customers, four of which have stakes in ONI. Last quarter, Williams accounted for one-third of the company's revenue. And fairly typical for a networking start-up, ONI is far from profitable. Last year, the company reported a loss of $43 million on $3 million in sales. In 1998, ONI reported a loss of $8.8 million on $1.7 million in revenue.

Bross will get 180,000 shares for his work on ONI's board. Bross has also exercised an option to buy an additional 142,460 shares at $6.32 apiece. That's at least $4.1 million for his board duties and an additional stake worth $3.3 million at the $23 IPO price, set Monday.

In addition to Bross' stake, Williams -- through an investment arm of the company -- holds 1.6 million shares of ONI. At the IPO price, that stake is worth more than $36 million.

Bross was unavailable for comment, and ONI officials declined to comment, citing the quiet period before their IPO.

Bross is no stranger to this game: Last year he scored big with his stake in



IPO. Sycamore's shares

jumped a healthy 612% in their Oct. 22 debut.

Raising the Question

"I don't think it's unethical, but maybe you have to question whether ONI offers superior equipment to its competitors," says

Wasserstein Perella

telecom analyst William Klein, who has no rating on Williams. "Hopefully Williams has a review process in place so the CTO is not the only guy that has the say in the purchase contract." Wasserstein Perella handled a recent debt offering for Williams.

Williams seems to agree, at least in Bross' case. Last month the company issued a policy prohibiting employees from benefiting personally from relationships with vendors, though Bross' deal stood because he got in under the wire, a Williams representative says.

But Williams continues to invest in vendors and potential vendors. For instance, Williams has a nifty arrangement with long-haul optical newbie


. According to a filing with the

Securities and Exchange Commission

, Williams and rival network operator


( BRW) will split $40 million of Corvis' convertible preferred stock and an option to buy up to $5 million of common stock at the initial offering price. Together Williams and Broadwing agreed to buy $200 million worth of Corvis equipment over the next two years.

The Mother of Invention

Why would companies operating in the most attractive corner of the tech sector need these sweetheart deals and paid-for endorsements? Speed to market.

With no track record and big losses on little revenue, these optical start-ups need immediate clout so they can take their technology to the public market and fund further development. And with interest at an intense level, investors need little more than the word "optical" in a company's description to open up the checkbook.

Optical switcher Sycamore, for instance, last year rushed to the stock market with little to show but a $24.5 million commitment from one customer: Williams.

Checking the Alignment

But to some observers, the issue is more with the alignment of the parties' interests.

Jeff Wrona runs

PBHG's Technology & Communications

fund and is getting in on the ONI offering Tuesday. Wrona said he wasn't aware that Bross was holding ONI shares, and while the discovery doesn't change his mind on the company, he says he'd prefer if Bross wasn't gaining from the IPO.

"I'd be more concerned if it was just the CTO and not Williams as a company involved," says Wrona. "In other words, everyone's interests are aligned right now. Whether it is theoretically fair or not is a different matter."