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This is the story of the battle between the employer and the employees. It was ended by the court last week, but in the hearts and minds of the participants, it may not be over for a long, long time.
Monday, April 8, was the final hearing for Loki's chapter 7 bankruptcy filing. The company that ported Windows games to Linux had previously filed for chapter 13, which allows for reorganization of the company and for time to develop a plan to pay back creditors. Chapter 7 is different. If you're granted a chapter 7, in the eyes of the law you don't owe anything anymore, to anyone.
That's a big relief for Scott Draeker, the man behind the phenomenon that was Loki Software. "Things were dire at Loki in December 2000," he says. "On January 7, 2001, I emailed all employees that effective immediately we could not guarantee that we would be able to make any future payrolls and that they should all start looking for jobs."
So they did. In the meantime, Draeker says he tried to pay his employees whenever he could. "We did hand out money orders whenever possible, as loans toward unpaid salary." The employees say they didn't know anything about loans.
"We understood that these checks were our salary," says Sam Lantinga, who was the lead programmer at Loki. "In fact, we weren't told that the checks were considered loans until later."
And it wasn't until later the employees also found out their employment status had been changed from W-2 to 1099, they said. W-2 is the norm for employees; the employer automatically deducts social security and income taxes from the gross wage amount. With a 1099 status, the worker is no longer a traditional employee but an independent contractor. The "employer" becomes a customer and is not responsible for deducting or paying any taxes on behalf of the contractor.
Draeker says he had no choice but to change the employees' status to 1099. "Fast forward to 2002 and Loki is submitting tax records. How can we handle the loan payments? They have to be reported, and we learned that any money transferred to employees must fall under either a W-2 or a 1099. Since there were no withholdings from the loan payments, they didn't qualify for W-2."
Lantinga found out from the IRS that the employees didn't have to be saddled with the extra tax burden. "They said that this (being switched from W-2 to 1099) happens fairly often with failed startup companies." He filled out a substitute W-2 with zero withholding, which left him owing, but not nearly as much as he would if he were considered a contractor under the 1099 filing.
Eventually, the employees found other jobs, which led to what Draeker calls the March 31 exodus, when at least five staffers left Loki. In reality, they were just a few of the almost two dozen programmers and support staff who left during the months after the January 7 announcement. "I have heard that the exodus was meant to put Loki out of business," Draeker says. "The fact that it didn't may have further embittered the crew that left." When they left, Loki still owed them salary. But at that point, Draeker says his loyalties had to remain with the business first, and the remaining employees second. "Like any creditors, these guys all wanted to be paid first, immediately and in full. From a debtor's standpoint, however, you can't always just pay everyone immediately. Loki's first priority became staying in business. Our remaining employees were paid first and the former employees second," he says.
Some ex-employees were beginning to think they were never going to be paid. "The 'exodus' was due to not being able to pay our rent," says one former Loki ex-employee who wishes to remain anonymous. "I was tired of sleeping in the Loki offices. No one had seen any money for a long time... Of course we wanted to get paid. We weren't corporations and companies like Activision and Electronic Arts, who would write off the loss. I don't think it's irrational to expect your paycheck."
The former staff started filing lawsuits and labor board complaints, according to Draeker. "They had meetings where they passed out forms and instructions for filing labor board complaints. Anyone who was pursuing a settlement with Loki was encouraged not to," says Draeker. In response to this action, which at least one ex-employee disputes, on August 3, 2001 he filed for a chapter 11 bankruptcy reorganization. "Our goal was to stay in business and to treat all our creditors equally." He says that he pursued settlements with those ex-employees who did not file suits or complaints. "The ones who filed suits received nothing, and those are the ones complaining the loudest now."
Lance Colvin thinks he's had a right to complain. He was the vice president of sales and marketing for Loki, having received and accepted an offer letter dated February 9, 1999. "Congratulations," it reads. "It is my privilege to inform you that Loki Entertainment Software has decided to extend this offer of employment as 'Vice President, Sales and Marketing.'" The terms of employment included a $80,000 yearly salary, 100,000 stock options, and six weeks of vacation each year. The rub comes further down in the letter. "Finally, as we discussed, payment of your salary is temporarily suspended. You and I will speak from time to time to determine when the company is financially able to begin payment of your salary."
Draeker maintains that because of Colvin's willingness to forego payment, he wasn't an employee as much as he was an investor in Loki. "Our attorneys spent a fair amount of time arguing over whether this individual could be properly categorized as an employee." He says that Colvin should have known the risks involved with joining a startup as well as the potential rewards. "It's possible [Colvin] never considered that Loki would always be hand-to-mouth." Draeker says Colvin testified that he thought Loki would eventually give him a million dollars.
"This was not, and never has been my understanding," says Colvin, whose responsibilities at Loki included maintaining the company books and making sure the bills were paid. "I believe that when questioned about what I expected, I had cited [a situation] where a friend of mine had been given a million dollars worth of stock when the company he had assisted was sold. I believe I said I was hoping for something similar."
Colvin testified to the labor board that he purchased most of Loki's computer equipment with his own money. He allowed Loki to make charges on his personal credit card, and he loaned cash as well. Even his mother loaned Loki $5,000 to make payroll in December 1999. "[Draker's] idea of scraping together the next payroll was coming to me to see where I could get it -- loan from family, pressure on accounts that owed us money, etc. He told me once that one of the reasons I was at the company was for my ability to get my hands on money."
The transcript of the California labor board hearing records an obvious question from the hearing officer: "Why did you go without payment for so long?"
Colvin's answer: "Because Scott always told me he'd take care of me. I've known him for ten years before we went into business together, before he asked me to work for him and I had faith that the company would make it. And towards the end of 2000 I discovered that -- that basically he lied to me, that he really seemingly didn't have any intention of paying and there were -- I actually made treaties to him throughout the year. I'd send him one email which said, 'I'm broke, I've been living for two months without expenses which -- or with no income into my house' and he ignored that. And also because I have had a substantial interest in the company in the form of equipment that I've purchased on behalf of the company and so on, I was a little bit afraid to leave to be honest. I was afraid I'd never get paid and that's actually what brought up this hearing is because he did refuse to pay me my wages and my expenses."
The creditor filings showed that by the end of Colvin's tenure at Loki, the company owed him almost $350,000 in salary and expenses that were incurred on Colvin's personal credit card. Draeker says that Colvin knew the risk he was taking, and he maintains that Colvin was more of an investor than an employee. "This question was never resolved by the court, but it's clear that this isn't about an employee reimbursement. This was money he invested."
Draeker calls the ex-employee complaints a personal war against Loki and Draeker himself. In his response to the hearing officer's question, he testified, "That was the deal that he made. He was an officer of the company, he is an equity holder of the company, as are members of his family, and he made the informed decision not only because of his position with the company but also because he was keeping the books. He made the informed decision to work at the company in hopes that there would be a payoff in the future. Now that, you know, the company has not to date had that success, he has made a claim trying to retroactively change the terms of the deal he struck because he doesn't like the result."
Colvin counters: "Actually, the labor board found that I was indeed an employee. [They] found from the evidence I presented at the hearing that Loki owed me $100,000 in business expenses." He says that Draeker appealed the decision, claiming again the Colvin was a partner in the company and not an employee.
But Draeker and Colvin both note that Colvin's relationship with Loki was "terminated." Says Draeker, "When the board fired [Colvin] in January 2001 it bruised a very fragile ego."
"How he could terminate a partner, I'm not quite sure," says Colvin. He maintains that Draeker filed bankruptcy in response to the August 6, 2001, labor board appeal. "Scott filed emergency bankruptcy on August 3. If it was clear I was an investor, why did he file bankruptcy?"
Colvin and other ex-employees have said that during the time Loki was having trouble making payroll, the Drakers continued to pull money out of the company. Draeker disputes that. "Although my wife and I were both salaried, we rarely paid ourselves. Loki didn't have the money, and I insisted that payroll for the other employees was the highest priority."
Colvin disagrees. He says Draeker's assertion that he rarely paid himself or his wife is "an out-and-out lie."
"Kayt [Draeker's wife] was paid nearly every payroll period," says Colvin. He showed us a memo Draeker emailed to him on April 17, 2000, about the procedure for paying employees and bills. The relevant portion, where Draeker is outlining the priority of payment:
"Tier 0 -- The first thing we pay always and without exception: Programmer's payroll $26k semi-monthly."
"Tier 1 -- Highest priority payments. These are always paid unless and until some crisis comes along and I am notified first:
Internet Access (3k month)
Employee benefits (Blue Cross, etc.)
Dennis (10k due)
John Grantham (2,700)
Laurie Hayde (you didn't include her)
"Tier 2 -- Paid once obligations from 0 and 1 are taken care of:
Exec payroll (7.5k)
Proforma (15k over 60 and another 11k going over 4/30)
The Kompany.com (56k due)
"Tier 3 -- To be paid in the following order of importance. Can in some instances come before a Tier 2 payment. I'd like a calendar date when you anticipate each of these being met:
"Code Sorcery (2,400)
id Software (50k) (forgot that one?)
"BTW: did you pay xxxxx his $5,500 signing bonus? If not, then shouldn't it be listed here?
"BTW: Exec payroll doesn't include Kayt. She's Tier 1."
There is another email in which Draeker chides Colvin for not paying Kayt along with the Tier 0 programmers.
Yet, Draeker says, "After most of the employees quit on March 31 , it became much easier to meet our monthly expenses, including payroll for the few who stayed on, and even some debts. Only then did my wife and I start receiving our salaries."
Now that the chapter 7 bankruptcy hearing is over, the slate has been wiped clean for Draeker. Even though the labor board found in favor of Colvin's claim for business expenses, Draeker is not held responsible in the eyes of the law because of the bankruptcy victory.
And even though Draeker's financial debt has been erased from the law books, there is still a price to be paid by everyone who has been a part of the dream that died.
"Looking back at Loki, we created a brand new industry." -- Draeker
"Companies go out of business all the time. Many do it with more grace and ethics than Loki did." -- Loki ex-employee
"The hard part is moving on with your life. We all read about crimes and random evil in the news. It's disconcerting to be the intentional target of some of that. It's like being pursued by a pack of Ahabs who think you're their white whale. " -- Draeker
"Scott lost his two oldest friends. He left a few people in financial ruin that will take years to undo." -- Colvin
"I've heard there were boasts about taking my house and putting me and my family on the street. It's all bark and no bite, but still stressful for my family to hear. I would ask those folks responsible to at least have the dignity to leave my wife and kids out of this." -- Draeker
"I'm stuck with a real debt of $100,000 -- not counting loans I had to get to pay rent and put food on the table." -- Colvin
"We generated nearly $3 million in revenues over three years, won dozens of awards and accolades, had a huge amount of great press, created jobs and came within spitting distance of making some folks millionaires. The Loki name was known around the world. At one time our revenues were in the same ballpark as Turbolinux and LinuxCare. We created a huge reservoir of Open Source tools and libraries that will be used for years to come. Next time, I think I can do even better." -- Draeker
"I am left poorer, but much wiser." -- Lantinga