SAN FRANCISCO -- Net stock options doled out to company executives are worth more than gold dust. It's somewhat disconcerting, then, when a top executive at a newly public Net start-up retains the right to convert his stock into those of the start-up's parent company.
Such is the case with Clifford Sobel, chairman of
(NTOP:Nasdaq), who can swap his 8% share in the company for an option to purchase 3.7% of the shares of its parent
at a discount, according to filings with the
Securities and Exchange Commission
Sobel's stake in Net2Phone, which cost him just $100,000 a year and a half ago, is worth approximately $76 million as of Tuesday's close. If he gives his shares back to IDT, Sobel would be able to buy IDT stock worth about $14.7 million for just $5.7 million.
So far, Sobel doesn't need to convert. Net2Phone, offered at 15 last Thursday, is trading at 20 Wednesday, down 38% from its high of 32 last Friday. IDT, now at around 16 3/4, is down 52% since its April high amid
concerns about some of its business deals.
Sobel's provision is already raising eyebrows on Wall Street. One money manager who snapped up Net2Phone shares at the offering price of 15 says he'll likely sell this week to lock in his gains. The manager says he'd shy away from any Internet company that gave a top executive a provision such as the one Net2Phone granted Sobel because it indicates a "lack of commitment."
Although some executives have managed to retain options in the parent when hopping to a new venture, Sobel's contract is "not an arrangement I've ever seen before," says Richard Semler, principal with
Sibson & Co.
, a Princeton, N.J. compensation consulting firm.
It will take a dramatic turn of events for Sobel's options to outshine Net2Phone, although he has only until September 2000 to make the swap. But if he does, he would be waving a potential "red flag," says Semler.
The Net2Phone arrangement might prove an even more powerful indicator than insider selling, which often sounds an alarm for investors: It's one thing to sell company shares to buy a house, and quite another to decide that another stock is a superior investment.
Net2Phone, restricted by an SEC-enforced quiet period, didn't make Sobel available for an interview and declined to comment for this story. IDT didn't return phone calls.
Three years ago IDT, a phone and data carrier based in Hackensack, N.J., created its Net2Phone division. Net2Phone allows corporations and consumers to make voice calls through their PCs -- and, increasingly, their phones -- using an Internet connection. Its business is deeply entwined with IDT, which owns 57% of Net2Phone's stock and 65% of the voting power. Net2Phone has earmarked $7 million of the $76 million it raised from its IPO to repay debts to the parent, while IDT has used its Net2Phone stake as collateral for credit. The two companies market their services jointly, and Net2Phone uses IDT's network.
Recent technology spinoffs do not have this unusual provision.
launched online auction site
in 1997 and spun it off to the public in December 1998. Managers at uBid cannot exchange their uBid stock options for those of Creative Computers.
The same is true for executives with
, a network chipmaker that was spun off by networking-software maker
, also in December 1998.
It's unclear what motivated Sobel, whose resume is filled largely with private companies, to reach this agreement. Sobel signed his first contract with IDT in May 1997, when tech stocks were climbing. At that time however, customers marketwide were balking at the quality of Internet-phone service, according to analyst Betsy Yocom with the consulting firm
Sobel kept his special arrangement when he signed a new contract in May 1999. By then, Internet IPOs were meeting with new skepticism, although Internet-phone services were more established. "The market is literally exploding," says Yocom.
Net2Phone isn't asking much of Sobel. It only requires that "he is employed by us as of Sept. 15, 1999 and owns and holds all of the stock he received, other than shares that he transferred to a trust for the benefit of his offspring," according to the company's prospectus. As of the filing, Sobel held no options to purchase Net2Phone stock.
For many, Sobel's compensation arrangement doesn't overshadow the company's outlook, it just sets up an early warning system. "If I believed in the business model and what they were trying to do, I would just let this be a neutral," says Steve Patchel, compensation consultant at
Watson Wyatt Worldwide
. "But I'd want to keep my eye on it."