For Verizon and Vonage, VoIP Battle Personal

Verizon insiders hold 21.3 million shares and options; Vonage has big VC backers.
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It's hardly a surprise that

Verizon

(VZ) - Get Report

is trying to kill

Vonage

(VG) - Get Report

.

Voice-over-Internet protocol, which should really be called "telephone freedom," is the biggest threat the major phone companies have faced. The breakup of

AT&T

(T) - Get Report

and the advent of wireless don't even come close.

For phone companies, Verizon's victory in last month's patent trial was a great start. It has left Vonage, the most prominent VoIP provider, in crisis and reeling from judgment to judgment.

For the folks running this campaign, the battle is deeply personal.

Residential and small-business fixed-line telephony accounted for 44% of Verizon's sales last year.

Verizon's executives and directors hold 21.3 million shares and options among them, including 6.5 million for Chief Executive Ivan Seidenberg. His stake includes 4.6 million options that are worthless if the stock stays below $35, and only start to gain value in tranches above that.

Prior to last month's court victory, Verizon was down to $35.30. Since then, it's jumped nearly $3. Nice work in short order.

You can expect VoIP and phone freedom to become a political issue. It's worth noting that Verizon and AT&T are two of the most connected companies where it counts -- in Washington, D.C. Between them, they gave $5 million to political campaigns in the 2005-06 campaign season alone.

All of which may make Vonage look pretty heavily outgunned. The VoIP company already was reeling from wounds, many of them self-inflicted, before last month's devastating court defeat. Right now, it's living from court judgment to court judgment. It is pinning its hopes on an appeal on April 24.

Investors poured $611 million into the company when it went public last year at $17 a share. Price now: $3. So far they have lost $503 million, or 82 cents on the dollar.

Of course, not everybody was a loser. Wall Street banks

Citigroup

(C) - Get Report

,

Deutsche Bank

(DB) - Get Report

and

UBS

(UBS) - Get Report

pocketed more than $7 million apiece for handling the IPO, while

Bear Stearns

(BSC)

got more than $5 million and

Piper Jaffray

(PJC) - Get Report

and

Thomas Weisel

(TWPG)

about $2.5 million each.

But if you're a Vonage investor, there's one thing that might give you a certain amount of comfort.

The venture capital firms that backed the company are riding in the stagecoach right beside you. Among them is the powerful Bain Capital -- whose founder, Mitt Romney, is making a serious run at the White House.

Bain Capital, Meritech Capital, New Enterprise Associates and Britain's 3i own 45% of the company. It's unclear how much each company invested, but the prospectus says the firms and Vonage founder Jeff Citron have invested a total of $450 million in the company. You normally would expect nearly all of that to come from the VCs.

It's hard to see them letting that go without a fight.

Among the other things to note is that none of the founding investors cashed out. On the contrary, they actually have invested an extra $10 million since the IPO. It's not much, but it's real money. Most of that has been by 3i, although Citron bought another $1.3 million worth of stock last August at around $6.70 a share. This was after Verizon filed its lawsuit, though a long time before it won in court.

All of this makes you wonder if we might see a deal. It would be surprising if this story is over. Too many powerful people have a vested interest in a happier ending.

In keeping with TSC's editorial policy, Brett Arends doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Arends takes a critical look inside mutual funds and the personal finance industry in a twice-weekly column that ranges from investment advice for the general reader to the industry's latest scoop. Prior to joining TheStreet.com in 2006, he worked for more than two years at the Boston Herald, where he revived the paper's well-known 'On State Street' finance column and was part of a team that won two SABEW awards in 2005. He had previously written for the Daily Telegraph and Daily Mail newspapers in London, the magazine Private Eye, and for Global Agenda, the official magazine of the World Economic Summit in Davos, Switzerland. Arends has also written a book on sports 'futures' betting.