Microsoft's Unlikely Millionaires

By Timothy Egan
The New York Times

June 28, 1992

SEATTLE - Just a few years ago, when the monied class of this city gathered inside a single ballroom for an annual arts benefit, nary an unfamiliar face could be seen. Families named Boeing, Nordstrom and Weyerhaeuser, representing airplane, clothing-store and timber empires, were the financial powers of this corner of the Far West. They were also benevolent civic players, keeping the arts afloat and leading drives to save a sports team or add a wing to a hospital.

But virtually overnight, the pecking order of wealth in the Pacific Northwest has been turned upside down. The reason: The stunning success of the Microsoft Corporation, the company that William H. Gates 3d brought back to his hometown little more than a decade ago.

Microsoft turns cautionary at the dropping of figures, but a distinguished Wall Street research firm estimates that at least 2,200 employees at Microsoft's Redmond headquarters east of here -- nearly one in five -- are millionaires. Not even the height of the Wall Street takeover frenzy of the mid-1980's made as many instant millionaires as did simple employment at Microsoft for the last five years, analysts say.

The Microsoft millionaires are unlike any in the world. Not only are many under the age of 30, the vast majority are not executives or lawyers but rather software writers with technical backgrounds.

As they mature, they could change the uses of wealth as much as they changed the world of computers. They refuse to follow patterns of the old guard. Unlike many of their wealthy peers, who contribute to political candidates and to established philanthropies, they are generally not politically active, and rarely support benefits for traditional causes like the arts.

But they are nevertheless having an effect in this community -- through the many jobs they've generated at Microsoft and their own startup businesses, and through generous contributions to local schools and universities. Even the recent acquisition of the Seattle Mariners baseball team by a group led by the founders of Nintendo would never have been approved without an investment from Chris Larson, a 33-year-old Microsoft executive who contributed about $30 million to the deal.

Driven by the Dream

Perhaps most striking, this new generation of Puget Sound rich is even less ostentatious than previous ones in a city that has never been a place of showy wealth. Many of the newly wealthy Microsoft employees -- and the vast majority are men -- have not bought a house. They do not belong to country clubs and the car of choice among them is a Lexus, the kind Mr. Gates drives to work. No chauffeured Rolls-Royces for this group.

They tend to be dreamers, with visions for the advancement of technology to fulfill before they slow down. Energetic and sleepless, many keep to the 16-hour days established by Chairman Bill, as Mr. Gates is known. Ostentation is the occasional $50 bottle of wine to go with their trademark cheeseburgers.

"People who worked on Wall Street in the 1980's just wanted to make a lot of money," said William Pope, 37, who has been with Microsoft for six years. "The people at Microsoft want to change the world."

At the top of it all is the 36-year-old Mr. Gates, considered the richest man in America, with a net worth, based on the value of his stock holdings, of about $7 billion. The stock of Microsoft, the world's largest computer software company with revenues of more than $2 billion, has gone up by 1,200 percent since it was first offered to the public in 1986 and is now worth more than that of General Motors.

It was thanks to generous stock options, according to a recent study by Michael Kwatinetz, an analyst at the Wall Street firm Sanford C. Bernstein, that at least 2,200 of the 11,000 people who work at Microsoft headquarters became millionaires. As many as a third of them are worth more than $3 million.

Microsoft officials argue that the 2,200 number is too high. Based on stock holdings alone, there are only about 500 millionaires at the company, said Buck Ferguson, senior director of investor relations. However, he said, there was no way to account for the number of employees who may have sold their stock and invested their windfall elsewhere. Thus, the 2,200 figure could be accurate, he said, "if you look at it just one way."

No matter what the precise figure, the Microsoft millionaires are somewhat of a phantom group among Seattle's wealthy. Defiantly tieless, usually wearing tennis shoes to work, they will not be found sharing golf tips among more established millionaires at the Rainier Club, Seattle's oldest domain for the rich.

These newly wealthy employees, current and former, say the last thing they want is to be a part of the status quo. They tend to be low key.

"I don't jump up and down about what we've done," said Mark Rolsing, who, unlike many of his fellow employees, gave up the seven-day workweeks he put in as a Microsoft manager to open a fly-fishing business. Starting at Microsoft in 1983, Mr. Rolsing, now 44, said great wealth was never a goal of early employees.

"No one knew they were worth anything back then," he said.

The more "established" of the Microsofters are just starting to spread their wealth, building high-tech mansions on Lake Washington, which separates Seattle from the east-side suburbs of Bellevue and Redmond. Or they are starting new companies, tiny offspring of the dream Mr. Gates brought to such a grand scale.

The Job Machine

Kevin DeGraaf, a 27-year-old software engineer who became wealthy in less than five years, continues to work at Microsoft but has also started three companies: a construction firm, a paralegal office and an automobile windshield company. Together, they employ more than 50 people. A fourth project, creating microbrewed beer, is on the drawing board.

Mr. DeGraaf is a veritable job creation machine, and a junior-league captain of wealth. But he has never owned a home, drives the same Volkswagen he bought in college, and pays $300 rent on a house he shares with three others.

"I've seen other people at Microsoft spend their money on houses and cars," Mr. DeGraaf said. "At some point, I'll upgrade those things, but I've got other things to do now."

Census figures show that the nation's rich tend to be corporate executives, lawyers, people living on trust funds, or entrepreneurs. This Microsoft class may well make up the first large group of American millionaires from technical backgrounds. Fortunes were made in Silicon Valley, of course, but never have so many technical people, working at one company, become so rich so quickly, say computer industry analysts.

Money Modesty

"Everybody at Microsoft wanted to change the world through technology," said Steve Wood, 39, one of the five original employees of Microsoft. He has since left to join Paul Allen, the co-founder of Microsoft, in a new software company, Asymetrix. "The money is nice, and nobody's complaining about it. But I don't know anybody who wants to just retire."

Mr. Wood said the business and technical leaders of his generation have only begun to show their stuff. "I think there's another revolution coming, in consumer electronics, and it will be led by the same people who were attracted to Microsoft," he said. "The older folks among us are just turning 40. We have a lot to do."

While stories of instant wealth are commonplace at Microsoft, few people seem to dwell on it. "People sort of watch it, but I don't hear people talking about it very much," said Nils von Veh, a 40-year-old product manager who has been at Microsoft for three years. "The bottom line is that people at this point are so consumed with their jobs; the company has so much still to accomplish."

Microsoft officials point out that many of their employees are millionaires on paper only. The stock could always fall, in fact, did last week. And when an employee does cash out, taxes take a big bite of their holdings.

"A lot of people are still kind of pinching themselves and saying, 'Is it real? Can it last?' " Mr. Pope said. "It's kind of a gift from heaven."

Mr. Wood, who was Microsoft's second general manager, said: "For a few people, the money was distracting, but not for most. It might have made people feel more secure. They might step back from 80 hours a week to 50 hours."

Among older employees, the wealth tends to dwarf the three-generations-old fortunes of established Seattle families. At the highest rung, Microsoft has created two billionaires besides Mr. Gates. Paul Allen, Mr. Gates's childhood friend and the co-founder of Microsoft who has since left, retains stock holdings worth about $3 billion. Steven A. Ballmer, the company's executive vice president, who met Mr. Gates at Harvard, is worth at least $1 billion based on the value of his shares.

Dozens of other employees in the executive circle have holdings valued at $10 million to $50 million.

What may be most unusual about the Microsoft millionaires is their extreme understatement. "There are people out there at Microsoft worth far more than an established Seattle millionaire and nobody's ever heard of them," said Herman Sarkowsky, a Seattle civic leader active in the arts and with professional sports teams.

The old money lives in the Highlands, a private compound nestled among 200-foot Douglas firs on the shore of Puget Sound north of Seattle. The houses there are elegant, with indoor swimming pools, well-tended gardens, and nice views of the Olympic Mountains. Private guards keep out the uninvited.

By contrast, the newly minted moneymen cling to old haunts. Mr. Larson, for example, who first went to work for Mr. Gates in a business they hatched when they were teen-agers, lives in an old, multiracial neighborhood of Seattle.

Both Mr. Gates and Mr. Allen are building 40,000-square-foot homes on Lake Washington. But even these ambitious projects put the emphasis on a break with the past. Much of Mr. Gates's home will be underground, the rooms lined with walls that become high-definition screens for viewing art work stored in a computer. He will also have his own salmon run, the fish returning to a small creek at his doorstep.

While the older money can be counted on for political donations, of the conservative sort, the new money has yet to be felt in campaigns.

Knute Berger, publisher of East Side Week, a newspaper in the high-tech corridor of Seattle's suburbs, describes the Microsoft millionaires as libertarians or "Tsongas Democrats," who follow the philosophy of Paul Tsongas, the unsuccessful candidate for the Democratic Presidential nomination.

John Carlson, head of the Washington Institute for Policy Studies, a conservative research center based in Bellevue, says that "Few of them really have a passion for politics. They would rather play hackey sack than donate to a campaign."

It will take a few years, maybe even decades, to see how this new class uses its money. Mr. Gates and others at Microsoft, still busy building their company, have said they are not yet ready to play philanthropist.

Keeping It Local

However, their wealth is already being felt in the community.

Two Pacific Northwest teams would probably not be in local hands were it not for Microsoft money. Mr. Allen bought the Portland Trailblazers, a National Basketball Association club, for $70 million in 1988.

When word leaked last August that the Mariners might move out, banners immediately went up at the Kingdome, where the team plays its games: "Bill Gates -- Save Us." (There are days when Mr. Gates's net worth goes up, based on stock appreciation, by more than $100 million. Why not take one day's earnings, goes the civic lament, and save a baseball team, or rescue a fledgling charity?)

With Microsoft's Mr. Larson to the rescue, the Mariners, in one of biggest surprises in recent professional sports history, were sold for about $100 million to the Nintendo-led group of investors.

When they do dabble in philanthropy, the Microsoft millionaires tend to favor local schools. Last year, Mr. Gates gave $11 million to the University of Washington to establish a department of molecular biotechnology. It was the largest single gift in the history of the Seattle university. Mr. Gates's mother, Mary Gates, is a regent at the school.

Mr. Allen also gave nearly $11 million to the University of Washington to help build a new wing for the main library. In 1986, the two co-founders of Microsoft combined to give $2.2 million to their old prep school in Seattle, Lakeside.

Quiet on the Art Front

In the arts, the Microsoft presence has barely been felt. The company gave $75,000 this year to the Corporate Council for the Arts, which raises and donates money to a variety of artistic groups. By contrast, the Boeing Company gave $275,000.

"Nobody's trying to buy social prominence with a big, sudden donation," said Peter Donnelly, head of the arts council. "But, of course, I would love to see Bill Gates take half a day's earnings and give the arts community $100 million."

When Scott Oki, 43, retired from Microsoft earlier this year, after 10 years at the company that allowed him to accumulate stock holdings worth more than $20 million, he started a company that makes blankets for infants. The proceeds, he said, will go to children's charities. He also said he wanted to do some "philanthropic things" for the community, a statement that set hearts racing among Seattle foundations.

Indeed, while there is no reason the Microsoft windfall could not just become fuel for self-indulgence, this seems to be a generation of millionaires with a cause. "These people are too creative to just join the country club and disappear," said Jean Floten, president of Bellevue Community College. She calls them "tennis-shoe millionaires." It is intended as a compliment.

MICROSOFT'S WAY WITH THE OPTION GAME

The base pay at Microsoft, for technical and marketing people alike, falls well below the industry average. But that doesn't mean millionaires are lacking.

The reason is a generous package of stock options, granted to more than half of the company's employees based on seniority, position and value to the company.

Well before the company went public, Microsoft's chairman, William H. Gates 3d, allowed many employees to buy stock for $1 a share. When the company did go public in March 1986, it was at $25.75 a share. A year later, it hit $90, sending out the first wave of millionaires.

As the company rapidly expanded in the late 1980's, new hires also got the chance to ride the Microsoft wave. Looking at 500 software developers who joined the company in 1989, Michael Kwatinetz, an analyst at the Wall Street firm Sanford C. Bernstein, noted that each was given an option to buy 3,000 shares of stock at $48 a share.

Employees do not actually pay for the stock until they exercise their options after a vesting period -- ranging from 18 months for 25 percent vesting to a little more than four years for full vesting. Many eventually pay for their stock by selling a portion of it, using a brokerage house that works with Microsoft. Others take out short-term loans to exercise their options.

Given the three stock splits since 1989, each of the 500 new hires studied by Mr. Kwatinetz could now have 13,500 shares. Multiplying the shares by the recent market price of about $75 would mean that each of the 1989 hires would own more than $1 million in Microsoft stock (although recent declines, which left the price at $66.75 on Friday, have cut into the gains). That is assuming that they did not buy any more, nor sell any holdings.

It's a system that inspires loyalty. If an employee leaves before becoming fully vested, he or she forfeits some stock. Thus, with employees looking a few years down the road, Microsoft has extremely low turnover.

GRAPHIC: Photos: Kevin DeGraaf (Doug Wilson for The New York Times) (pg. 1); Mark Rolsing, a Microsoft "oldster" at 44, dropped out to found a fly-fishing store. (Doug Wilson for The New York Times) (pg. 6)

Graphs: "The Class of '89 Watches Its Wealth Grow," track Microsoft stock price, 1986-June 26, 1992 (Source: Datastream); track 1989 options invested over 41/2 years, for key long-term employees, 1989 hires and other long-term employees (Sources: Sanford C. Bernstein estimates and company reports); breakdown of allocated stock options of 13.2 million shares of Microstock for fiscal 1989 (Sources: Sanford C. Bernstein estimates and company reports) (pg. 6)

Copyright 1992 The New York Times Company