The Scoop: rebellion at DataRobot over insider stock sales
What happens when executives are allowed to secretly sell stock at a company that is doing poorly? And what can founders learn from this incident?
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DataRobot is an AI management and deployment platform, which was valued at $6.3B when it raised $300M in July of 2021. In May of this year, the company let go of 7% of its staff as part of cost-cutting.
On 15th June of this year, in a damning revelation, The Information reported how five executives were allowed to sell $32M in stock as secondaries. As per The Information:
“The sales occurred after the company was privately valued at $6.3 billion in a funding round. The other 1,200 or so employees, some of whom had worked at the Boston-based company for close to a decade, didn’t get the same opportunity to sell their shares.
The sales were unusual. None of the senior executives who sold shares, including CEO Dan Wright, were founders. In fact, the executives had worked at DataRobot for a year and a half or less when the sales took place. And under their watch, expenses skyrocketed while revenue growth slowed, with the company missing one of Wright’s 2021 revenue targets by 75%.”
The article brought attention to other things not going right at the company. For example, DataRobot sent its top salespeople on a lavish trip to The Virgin Islands just days before laying off 7% of employees.
As the article came out, these sales caused understandable outrage amongst DataRobot staff. And it soon turned into more than just outrage.
A month later, on 15th July, Ben Taylor, the Chief AI Strategist at DataRobot, resigned, and sent this email to staff (emphasis and some formatting mine):
“Once I saw the stock sale article hit, my heart sunk. Absolute cronyism. Doesn't matter what words come next, actions are deafening. When that article was published, it was like a pin popping a morale balloon. Instead of bridging the gap in tech morale, the execs that sold stock broke our backs with their selfish act.
What they did was immoral. They stole millions from engineers who have worked for years to create a great product with average pay and long hours. Employees that missed family events, worked family vacations with the promise that their paper millions would be converted to cash. So, the employees stayed at DataRobot and worked harder while executives that had been there for months, not years, were cashing out.It is also important to note that the executives who were cashing out had missed all of their goals for the company. These executives cared more about their personal take than the mission. The other obvious question to the leaders still unanswered is: when they sold what and when did they know the sales forecast was changing and that the company was no longer going to IPO? (…)
We also have former DataRobot employees who have taken out exotic stock loans to cover $100,000-$1.000,000 worth of stock purchases and have been begging our executives to let them sell. These individuals put their heart and soul into the company and are now being forced to put their family's financial well-being on the line for these executives. The most important thing to do during a recession is to keep morale up and keep top talent.
The executives killed morale and our top talent are leaving in the next 2-3 months, welcome worst-case scenario. Promising employees and family riches, if they stay, will no longer work. As an Al company that means we're terminal. You might think our employees are replaceable but I feel quite the opposite.”
This memo caused huge waves inside the company, and outside of it as well.
Five days later, DataRobot’s CEO resigned following the controversy. On July 20th, CEO Dan Wright was forced to step down following the uproar over the stock compensation controversy and the struggles of the company. In his departure note, the CEO hinted on how he is leaving because of the internal pressure. As The Information reported:
“In his departure memo, Wright didn’t say why he was leaving, other than it was a ‘difficult’ decision. ‘Obviously, there's been a lot of external noise, and the last thing I want is for our team to be divided or distracted,’ Wright said. ‘Under normal circumstances, I would have stayed in my role to see us through our current challenges. But as a leader, it is my responsibility to put DataRobot first, even if that means I need to step aside.’”
What is there to learn from the DataRobot controversy? Sadly, this is a reminder of how startup dynamics work. Investors, founders, and executives are the ones calling the shots and often the ones making big money, even if the company struggles. And the reality is that secondary share sales are usually limited to founders and kept as a secret from the rest of the staff.
This is what happened at Hopin, where the founder of the company has sold closer to $150M in secondary shares while other employees have not gotten the same opportunity. Hopin has laid off more than 40% of the company in two separate layoffs. The founder, meanwhile, made almost as much through his share sales as the revenue the company's lifetime revenue.
Most secondary share sales are not reported. However, some less experienced founders flaunt their newly acquired wealth, drawing more questions. This is what happened at Secret, an anonymous social network that raised a total of $35M in six months before shutting down in 2015.
Ironically, Secret’s founders taking money off the table leaked in their anonymous social network: Secret. Only six months after founding, the company raised a $25M round of funding, and a post on Secret went viral sharing how the round involved secretly taking money off the table - $3M for each founder. As the screenshot shared by Business Insider:
If the employees had any doubt of the validity of the claim, soon enough one of the founders, David Byttow, bought a Ferrari and showed up at the office with it, dismissing any remaining doubts. As The New York Times reported at the time, this was a turning point for morale:
“But the news had broken that David Byttow and Chrys Bader, the founders of Secret, had sold part of their stake in the company for $6 million and that Mr. Byttow later bought a Ferrari. The founders did not initially tell the employees about the sale; instead, some of them found out on Secret.
Although Mr. Byttow and Mr. Bader reassured workers at the meeting that they were dedicated to the company, it was a turning point, said people close to Secret, who spoke on condition of anonymity. It shook the confidence of some workers, they said: If the founders had taken money off the table, it could mean they were protecting themselves against Secret’s failing.”
I see secondary share sales where tenured employees are not invited to participate as morally wrong. Should news of this leak, founders should expect employee attrition and have more trouble recruiting employees.
As a founder and executive, it’s fine to take money off the table when raising a new funding round, though. But don’t be surprised to face an employee revolt like what happened at DataRobot, should this news leak.
This was it for this issue. Interested in more scoop? Read the full subscriber version of this issue which also covers:
Layoffs at Shopify. The company let go 10% of its staff and posted a surprising loss a day later in their quarterly earnings.
The e-commerce growth bubble and layoffs. Why have we seen so many layoffs at companies where business boomed during 2020-21, like Shopify, Hopin, Cameo, Peloton and others? Looking at how e-commerce grew - then shrunk - in the US has some answers.
Google’s hiring freeze. The freeze dropped internally, and I talked with managers on what this means. Also: why did Google stop hiring entry-level software engineers?
Google’s earnings analysis. Investments the company is making - and areas they’ll likely hire more software engineers - economic uncertainty and how all this might speed up Google’s return to the office.
Scoop: hiring slowdowns. Vimeo, Robinhood, Graphcore.
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