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Idealab Shareholders Agree to Pay CEO's Loan

March 22, 2006|Sallie Hofmeister | Times Staff Writer

Shareholders of Idealab, the Pasadena-based technology incubator that spawned some of the Internet's biggest hits and misses, overwhelmingly agreed Tuesday to pay off a $50-million personal bank loan owed by founder Bill Gross.

Idealab will buy the loan from Bank of America for $20 million. It will collect from Gross the full $50 million plus interest and a $1-million annual fee over four years, according to a proxy statement obtained by The Times.

Investors holding 195 million Idealab shares approved the move, while those owning 2.6 million shares were opposed, said Steve Chadima, a spokesman for the privately held company.

Gross, who owns about 28% of Idealab's stock, was prevented from voting, as were employees and relatives, including his wife, Idealab President Marcia Goodstein.

Idealab was behind such hits as GoTo.com and such flops as EToys.com.

Shareholders approving the measure in effect are betting that Gross hasn't lost his touch to occasionally score a hit.

Shareholders would need one or more of Idealab's 14 companies -- operating in such fields as robotics, solar energy and online retailing -- to be sold or taken public, which would earn them their first dividend since Gross began the firm in 1996.

Some who voted to pay off the loan feared that if Gross defaulted, the bank could use the Idealab stock it holds as collateral to force a premature liquidation of assets at fire sale prices.

But other shareholders were reluctant to cover the loan.

Under the Sarbanes-Oxley Act of 2002, public companies are prohibited from making loans to their officers because of the questionable corporate benefits. Although private companies have more latitude, some shareholders wondered why Idealab and Gross weren't being held to the same standard.

A few investors suggested they might be better off divvying Idealab's $130 million in cash, shutting down the company and taking stakes in the start-ups with the best prospects.

One investor said that, based on Idealab's cash burn rate in the proxy, it could run out of money in three years, before it could cash out of one of its ventures.

The company, however, disputed the calculations, pointing out that the burn rate in the proxy of $3 million a month included what it took to operate Idealab as well as to fund its start-ups.

"The need of Idealab investments may go down because of the venture capital coming in," Chadima said.

Some shareholders are still wary of Idealab because of a shareholder lawsuit filed against Gross in 2002 that alleged fraud and self-dealing.

Although the complaint was settled last year, Gross said in an interview last week that the double whammy of the stock market crash of 2000 and the lawsuit forced Idealab to reform its practices and be more conservative.

"We are more careful about governance and we're more selective about the businesses we start," the 47-year-old entrepreneur said.

Gross used the Bank of America loan in 1999 to buy $43 million worth of Idealab stock before the company's planned public offering the following year.

When the stock market crashed in 2000, preventing the IPO, Gross did not have to default because the bank agreed to extend the loan until December 2005.

With foreclosure again looming, the bank agreed to give Idealab a steep discount on the loan for paying cash. It gave the board until the end of the month to resolve the issue.

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