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Laid-off techies work for stock options but no paycheck-Techies work for hope, not cash

As a product marketing director at Critical Path, Renae Perry pulled in more than $100,000 per year. After losing her job last year at the San Francisco communication technology company, she started working for Accerra Corp.

Julie N. Lynem, San Francisco Chronicle Staff Writer

Today, Perry works part time out of her home, handling product marketing chores for the Santa Rosa video- and audio-conferencing company. She decided to take the job even though she doesn’t get paid. Her only form of compensation: some stock options in the startup.

Rather than wait for work that may never come, Perry is part of a small and apparently growing number of highly skilled workers who are accepting so- called equity-only jobs. In many cases, they’ve taken jobs with no compensation or health benefits. Some are holding down these jobs while receiving unemployment benefits.

Whether to take such a job is a tough decision for unemployed workers like Perry, who see few alternatives in a tight job market. "It’s not like I’m going to walk out tomorrow and get a job," said Perry, 50, who lives in Healdsburg with her retired husband. "I either stay with this and work for free or have no job."

Some people apply for little-known jobs, which they find through word of mouth or on such Internet sites as Craigslist, with the fervent hope that they lead to permanent work.

Others take the leap because they are bored and want to do something constructive. For these workers, who are living off savings or leaning on a working spouse, it’s not solely about finding a full-time job or the lure of stock options.

They want to network, update skills and build a company from the ground up.

Those familiar with the startup game warn of the risks for both workers and companies in a tough economic environment. State officials say those working for equity can lose their unemployment benefits. Moreover, the startups that sign up these workers could be violating state labor laws.

A spokesman for the U.S. Department of Labor said it looks at each case to determine if any federal laws were broken.

Miles Locker, attorney for the California labor commissioner, said it’s against the state labor code for employers to offer stock options as compensation if they’re not paying workers at least the minimum wage. All workers in California must be paid at least $6.75 an hour, plus any applicable overtime. He said it doesn’t matter if the worker has agreed to work for less.

Locker also cautioned workers who call themselves independent contractors. True independent contractors have established their own businesses and are not economically dependent on any one employer, he said.

Employers, including fledgling startups, maintain they are not breaking the rules by hiring independent contractors and offering stock options instead of a regular paycheck.

For instance, Dana Simons, chief executive officer for Accerra, said those like Perry who are working for her company are not considered employees but independent contractors who can set their own hours, telecommute or work for another firm if they wish.

These workers are offered stock options and a letter of intent that says they will be hired as an employee if the company receives funding, said Simons,

who also is not being paid.

TOP TALENT SIGNS ON

Although Accerra, which is backed by angel investors, has little capital, Simons said it has attracted some top-notch talent. "People have their heart and soul in this place, and they want to be here," she said. "It’s a good way for people to get enrolled in the company and get a feel for what the company is like."

Accerra isn’t alone in providing work to the unemployed. Fred Davis, president and founder of Berkeley’s Prosumer Media Corp., which publishes Dig- iT magazine, offers stock to his freelance writers. Some can afford to accept such work because they have stashed savings, while others scrape by or rely on a working spouse.

All workers, he said, consider themselves investors in the company. They have no delusions about what they’re working for.

"We’re not getting people just out of college who think this is a fun thing to do for a first job," Davis said. "None of us are doing this for the practice. We believe in ourselves, and we believe in the concept."

At Modviz Inc., a San Mateo technology company, Bob Jacobson, chief executive officer, said workers should do their homework before coming on board. He said his independent contractors are offered stock options.

"You really have to know the business," said Jacobson, who hires people he has worked with before. "You can’t just take the owner’s word, because the owner may not know the business."

Working arrangements are a little different at Strategic Deployment, an out- source business development company based in an Orinda garage. Its workers are held to specific tasks and short-term contracts, said Benson Chan, managing director of the 8-month-old startup.

PAYCHECKS TO START NEXT MONTH

In January, everyone toiling for equity will be brought in on a part-time basis and paid, Chan said.

The company, bankrolled by Chan and two partners, now has some money coming in, he said.

Startups should take care not to treat people as if they’re working for free, said Chan, adding that workers also have a responsibility to understand what’s at stake. "It’s not to kill time, and it’s not a resume seller," he said. "This is their life. It’s their next career, and they have to choose carefully."

But free labor is exactly what these companies are getting if they do not pay workers at least minimum wage, said the state Labor Commission’s Locker. They can be assessed substantial penalties for nonpayment of wages.

Workers are entitled to recover unpaid wages or overtime compensation, including interest, attorney’s fees and the costs of a lawsuit, he said.

Further, employers can be fined $50 per employee for each pay period that the employee is underpaid.

Officials with the state Division of Labor Standards Enforcement say there’s no way to track who is being paid in stock options because the state does not consider options a form of compensation.

The state has jurisdiction only over proper payment of wages. It examines literally hundreds of claims filed by workers from a variety of industries.

MORE REPORTS OF NONPAYMENT

However, the labor commissioner’s office has investigated some nonpayment cases from the high-tech industry over the years. Locker saw a spike in such cases during the recession of the early 1990s and said more are beginning to trickle in.

"I think it’s an industry where people may be reluctant to come forward," Locker said. "I think we may start to see more complaints now because employees are going to get burned."

Perry said she is loyal to Accerra and was aware that it was struggling when she agreed to work as an independent contractor. After she was laid off in September, she and her husband moved to Sonoma County to be closer to their winery, which she manages.

Perry, who has worked in the computer business for about 15 years, lives off her husband’s Social Security and pension and has filed for COBRA, a federal law that allows laid-off workers to continue their group health benefits by paying the premiums themselves.

"You never know who’s going to buy you," Perry said. "If some big company were to buy our little company, that big company does have stock traded on the public market. Even if it was only worth $1, that’s worth something."

Of course, working for stock options is something quite familiar to Perry and others who went through the tech boom.

High-tech entrepreneurs then often labored long hours for little or nothing.

As high-tech startups began to heat up, company founders offered options in lieu of cash to employees to make up for low salaries and no benefits.

At the height of the boom, negotiating for stock options along with a six- figure salary became routine — a privilege enjoyed by both executives and rank and filers.

The tremendous potential for wealth made the risk worthwhile, said Paul Greenblatt, a career counselor and co-principal of Career and Life Planning in Palo Alto.

Today, the dreams are similar, but the stakes are higher. "Then it was about the promise and the excitement," Greenblatt said. "Now it’s more survival than it is adventure."

ROAD TO DISAPPOINTMENT

Unfortunately, workers may be setting themselves up for disappointment, said Kirthi Kalyanam, director of e-business initiatives at Santa Clara University’s Leavey School of Business.

"I think it’s a lose-lose game," he said. "It’s hard for me to see why a good company would ever engage in these kinds of things."

Some high-tech employees who have looked into equity-only jobs and haven’t accepted them because they’re skeptical.

Earlier this year, Phil Burton, a 40-plus Palo Alto resident with an engineering degree from the Massachusetts Institute of Technology, worked at Internet security products companies for stock after he was laid off last year.

He left after realizing that the company probably would not get funded. Burton, a former paid consultant for VeriSign, said he’s looking for full-time,

salaried work with medical benefits.

"It was better than sitting around doing nothing," he said of his stints at the small startups. "I can put that on my resume, and no one will ask whether I got paid or not. But after a while, you get tired of it."

Julian Milenbach, a former test center director at PC World, said he turned down two stock-option jobs. The El Cerrito resident, in his early 40s, has since decided not to deal with any companies that do not provide a regular paycheck. Instead, he’s developing his own business plan.

Companies that do not pay do not value workers’ labor or time, Milenbach said.

"The danger for many people is trusting that they will be taken care of, if and when the money comes in, rather than demanding their deal on paper before they start doing anything," said Milenbach, who has been seeking a job for about eight months.

For now, Perry is willing to take a chance.

"Everyone is working on the hope and promise of future money, even in this time when stocks are down," she said. "They’re still saying, ‘This could be it;

this could be the one.’ "

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