The Worst Business Decision Ever?
In February 1974, a 20 year old college dropout named Steve Jobs answered a newspaper classified ad and landed a $5-per-hour job as a technician at a new company in Los Gatos, California, called Atari. If you’re old enough to remember the 1970s, you probably remember the name: Atari is the company that essentially invented the video game industry when they introduced the game Pong in 1972.
At Atari, Jobs soon earned a reputation for being, well, a bit of a jerk. He was brilliant, and he knew it. He was also quick to let his coworkers known when he thought he was smarter than they were. He called them names to their faces. As if that wasn’t bad enough, Jobs, who was a vegetarian, had somehow gotten the idea that his meatless diet eliminated his body odor. That, he felt, made it unnecessary for him to bathe regularly, so he didn’t.
Been There, Done That
As anyone who worked around Jobs during his Atari days would assure you, conceit does not win you friends, and vegetarian diets do not eliminate body odor. The stinky, stuck-up prodigy was soon banished to the night shift, where his brains could be put to work for the company without his offensive personality and pungent aroma driving coworkers out into the street.
One man at Atari that Jobs did get along with was the chief draftsman, Ron Wayne. Jobs was intrigued with the idea of one day starting his own business, and Wayne, who was in his early 40s, had done this before. Jobs looked up to him as a mentor, and his advice would come in handy when Jobs and his high-school friend named Steve Wozniak considered launching their own company together in 1976.
Job’s and Wozniak’s decision to start a business together grew out of their participation in the Homebrew Computer Club, a group of hobbyists who built computers from mail-order kits or by scrounging parts from surplus military equipment and old office machines. The computers they were building were primitive: If you saw one today, you’d have trouble recognizing it as a computer.
Consider the Altair 8800, the machine that inspired the founding of the Homebrew club: Sold in kit form through Popular Electronics magazine, it was little more than a metal box with rows of lights and toggle switches on the front. It had no keyboard and no monitor. You programmed the Altair by flipping the toggle switches on and off to enter binary computer code. Once entered, the code made the lights blink in a specific sequence.
The was it- making lights flash on command was the only thing that the Altair 8800 could do. And yet it was so dazzling and so powerful a machine for its time that it not only inspired the founding of the Homebrew Computer Club, it also inspired a Harvard student named Bill Gates to drop out of college and form a business with his friend Paul Allen- a company they named Micro-Soft- to create a programming language for the machine.
Wozniak, an engineer at Hewlett-Packard’s calculator division, wanted to design a home computer that could do more than the Altair 8800. There were computers at the time that were capable of performing much more powerful operations, but they were enormous machines that took up entire rooms and cost so much money that only universities, large corporations, and government agencies could afford them. Some of these big computers would be accessed remotely over telephone lines, using a video terminal- a video monitor and keyboard that connected to the computer using a dial-up modem.
Wozniak thought that the newest microprocessor chips were powerful enough to enable video terminals to have small computer brains of their own, so that they wouldn’t need to connect to big computers far away. He decided to try to build one: Working in his Hewlett-Packard cubicle at night and on weekends, Wozniak designed and built a computer that had a keyboard, an ordinary TV for a video display (he thought computer monitors were too expensive), and a whopping 8 kb of memory. He also wrote the software that made the computer work.
On Sunday, June 29, 1975, Wozniak finished the computer and started it up. He typed a character, and it appeared on the screen!
A Company is Born
Wozniak had designed his computer simply for the fun of the challenge. He planned to print up the plans and give them away at meetings of the Homebrew Club, so that the members could build their own computers. It did not occur to him that money could be made from his invention- that was where Steve Jobs came in.
Jobs thought they could make circuit boards pre-printed with Wozniak’s design, almost like a paint-by-numbers kit, so that hobbyists would know where to install each component. He figured he could sell the circuit boards to members of the Homebrew Club for $50 apiece. So when Wozniak and Jobs decided to form a company in 1976, that was all they set out to make: pre-printed circuit boards.
Not Far from the Tree
To raise the money, they needed to launch their company and print the first batch of circuit boards. Jobs sold his Volkswagen van for $1,500 and Wozniak sold his programmable calculator for $250. Next they needed a name for their company, and tried out techie-sounding ones like “Executek” and “Matrix Electronics.” Jobs was on an all-fruit diet at the time (which proved no better than his old vegetarian diet at controlling body odor), and had recently returned from an Oregon commune, where he’d pruned some Gravenstein apple trees. He suggested “Apple Computer.” That sounded better than anything else they could think of, and it came before Atari in the phone book, so Apple it was.
Apples and Oranges
It was probably inevitable that Wozniak, who created things for fun and liked to give them away, would clash with Jobs, who wanted to build a business by selling things for profit. The two had their first big disagreement when Wozniak balked at giving Apple Computer the exclusive rights to his invention; he wanted to give his plans away free to Homebrew members who didn’t buy the circuit boards. And since he’d built the computer at his Hewlett-Packard workbench after hours, he felt that HP also had a claim to the technology.
Jobs, on the other hand, was convinced that Wozniak’s computer was the heart of Apple’s business, and without the exclusive use of that technology the company would have no value. He shared his concerns with Ron Wayne, his friend at Atari, and Wayne agreed.
Mr. 10 Percent
Wayne offered to have the pair over to his apartment, where he would try to convince Wozniak that Apple needed the exclusive rights to his design. It took about two hours to do it, but by the time Wayne was finished, Wozniak was a believer. His invention would be Apple’s and Apple’s alone.
Wayne was 20 years older than Jobs and Wozniak, and more mature than either of them. They were impressed by his business sense, and decided to make him a partner in the company. Instead of splitting ownership of Apple Computer 50/50 as they had planned, Wozniak and Jobs each took a 45 percent stake in the company, and gave Wayne the remaining 10 percent. That way, whenever they couldn’t agree on something, Wayne would serve as a tiebreaker, giving the winner the 55 percent majority needed to prevail.
Signed, Sealed, and Delivered
Ron Wayne wasn’t a lawyer, but he had “some background at writing in legalese,” as he puts it in his book, Adventures of an Apple Founder. So when Steve Jobs and Steve Wozniak were ready to launch Apple Computer, he drafted the company’s founding partnership agreement himself. In addition to dividing ownership between the three partners 45%-45%-10% as agreed, the contract stipulated that any expenditure of more than $100 would need the consent of at least two of the partners. The three men signed the contract on April 1, 1976, and Wayne filed it with the county registrar the next day. Apple Computer was in business.
Board of Education
Wozniak and Jobs printed up their first batch of Apple circuit boards and brought them to the Homebrew Computer Club. They sold quite a few. One of their most promising prospects should have been Paul Terrell, owner of a small chain of electronics hobby stores called the Byte Shop. But Terrell wasn’t interested, giving Jobs his business card and telling him to “keep in touch.”
The next day, Jobs walked (barefoot) into the Byte Shop. “I’m keeping in touch,” he told Terrell, and tried again to sell him some circuit boards. Terrel still wasn’t interested. What he wanted, he explained to Jobs, was fully-assembled computers. He wanted 50 of them, and he was willing to pay $500 apiece, in cash, as soon as they were delivered.
In the years to come, Steve Jobs would be hailed as a visionary, and he was, after all, the guy who thought that pre-printed circuit boards would sell. But in those early days, even he didn’t realize that there was a market for assembled computers, at least not until Terrell placed his order.
The Hard Part(s)
Wozniak, who made $24,000 a year at Hewlett-Packard, didn’t need a computer to tell him that 50 computers purchased for $500 each added up to $25,000- not a bad sale for a company launched with $1,750 raised from the sale of an old Volkswagen van and a calculator just a few weeks earlier.
But there was a catch: The computer chips and other parts that were needed to build those 50 computers were going to cost about $15,000. Where would they get the money? Jobs tried to borrow it from a bank, but, not surprisingly for a man who still wasn’t bathing regularly, he couldn’t get a loan. He finally found a school friend whose father was willing to lend him $5,000 for three months, and he also talked an electronics company into selling him parts on a 30-day credit.
The clock was ticking. Apple Computer, with three partners and no employees, had 30 days to assemble and deliver 50 computers, something it had never done before. Then it had to collect $25,000 and pay for the parts. The $5,000 loan would come due 60 days after that. If there were any snags and the creditors weren’t paid on time, they were likely to sue Jobs, Wozniak, and Wayne to recover their money.
And that’s when Wayne really began to think about what it meant to be a partner in Apple Computer. According to the contract that he himself had drawn up only days before, Apple was legally defined as a partnership, not a corporation- and there’s a big difference. Corporations have limited liability. If you buy shares in a corporation and the corporation goes bankrupt, your shares are wiped out and the money you’ve invested is gone. But that’s it- creditors who are owed money by the corporation cannot seize personal assets, such as your house and bank accounts, to settle the corporation’s debts.
A partnership is different: Each partner is personally liable for debts incurred by the partnership. It doesn’t necessarily mater if they’re major partners or minor partners, either. Wayne may have only had a 10 percent stake in Apple Computer, but he was just as liable for the company’s debts as either Jobs or Wozniak. If they didn’t have assets that could be seized to pay Apple’s debts, the creditors would likely try to seize Wayne’s assets instead. In fact, Jobs and Wozniak didn’t have any real assets. That meant that, in effect, Ron Wayne was assuming 100 percent of the risk in exchange for 10 percent of the profits… if any were ever to materialize.
The simplest explanation for why Apple Computer started out as a partnership and not as a corporation is that nobody thought the company would ever amount to much. Remember, when Wayne drafted the founding document, Apple was gearing up to sell circuit boards to hobbyists. A hot dog cart on a busy street corner would have had brighter prospects, so what difference did it make what kind of papers were drawn up? Partnerships are simpler than corporations and their taxes are often lower. When a business is small and likely to stay that way, a partnership is a good way to go.
Besides, how much debt could a circuit-board company pile up? A lot more than Wayne had bargained for, now that Apple Computer was really going to sell computers. Wayne had been involved in business failures before: A few years earlier a slot machine company he owned had gone under, and it had taken him nearly two years to repay his investors. When Jobs racked up $20,000 in debts to finance a single sale, Wayne thought long and hard about whether or not he wanted to remain associated with Apple Computer… and decided the risk was too great.
On April 12, 1976, just eleven days after helping to found Apple, Wayne returned to the Santa Clara Country courthouse and filed a “Statement of Withdrawal,” which would alter the course of his life forever. “Wayne shall hereafter cease to function in the status of ‘Partner,'” the document read, noting that Wayne had received $800 from Jobs and Wozniak for relinquishing his 10 percent stake. As far as anyone knows, he never owned a single share of Apple Computer again.
Thinking Outside the Box
Steve Jobs, Steve Wozniak, and a handful of friends and family members set to work filling the Byte Shop’s order of 50 computers. Working in a bedroom in Jobs’s parents’ house, then moving to the garage when the bedroom got too crowded, they finished with one day to spare. The Byte Shop got its computers, Apple got its money, and the bills got paid on time.
But as Paul Terrell, the owner of the Byte Shop, learned to his dismay, the Apple I “computer” was a very barebones products indeed: It was just a circuit board with the computer chips and other components installed, nothing more. The keyboard wasn’t included, neither was the monitor, and there wasn’t even a case to enclose the circuit board. Wozniak and Jobs still saw their computer as a product for hobbyists. They thought buyers would want to customize their machines by providing these parts themselves.
Terrell didn’t agree. He thought the computers, like toasters, should work right out of the box, so he added his own keyboards, monitors, and enclosures before putting his Apples on sale. It didn’t take Jobs and Wozniak long to see that he was right. They decided the Apple II, which Wozniak was already developing, would have a case and a built-in keyboard, with an optional monitor for people who didn’t have a spare TV.
New Partners No More
Jobs and Wozniak estimated that gearing up to manufacture the Apple II was going to cost at least $200,000. Once again, they didn’t have the money. After searching around for investors, they found a Silicon Valley millionaire named Mike Markkula who was willing to put up nearly $100,000 of his own funds, plus personally guarantee a $250,000 line of credit from Bank of America. In return, Markkula became an equal partner. But rather than invest in the old partnership, on January 3, 1977, Jobs, Wozniak, and Markkula formed a new corporation- Apple Computer Inc.- which promptly bought out the old partnership for $5,309. To ensure that their old partner Ron Wayne wouldn’t cause problems later, Jobs and Wozniak sent him a check for one third of that amount, or about $1,770, along with a letter asking him to forfeit any future claims against Apple Computer Inc. Wayne was surprised to receive money and happily signed the letter. Total compensation for signing away his Apple stake: $2,570.
What Could Have Been
When they formed Apple Computer Inc., Jobs, Wozniak, and Markkula each got 26 percent of the new corporation’s stock, setting aside the remaining 22 percent of shares to be sold to investors at some future time. That means that Jobs’s and Wozniak’s combined stake in the new corporation was 52 percent. Since Wayne was a 10 percent owner of the old partnership, it’s reasonable to assume that had he remained with the company, he would have received 10 percent of Jobs’s and Wozniak’s stake in the new corporation, or 5.2 percent, of Apple Computer Inc.
However relieved Wayne may have been at having exited Apple without losing everything he owned, his pleasure must surely have turned to pain when the Apple II became one of the bestselling personal computers of all time, raising the current partners’ fortunes (but not his) with it. on December 12, 1980, not quite five years after Wayne made his escape, Apple Computer Inc. went public. By the end of the month, the company was valued at $1.79 billion. Had Wayne held onto his 5.2 percent stake, it would have been worth just over $93 million.
It Gets Worse
It you’re an Apple fan, you know that the company has had its share of troubles over the years. Steve Wozniak ended his day-to-day involvement in the company in February 1985, and seven months later Steve Jobs left the company after losing a power struggle. With neither of the founders around to guide it, Apple floundered in the 1990s in the face of strong competition from computers that used the Microsoft Windows operating system. By the time Steve Jobs retook the helm as interim CEO in 1997, Apple was less than 90 days away from bankruptcy. Under his leadership, the company revamped its computer offerings and introduced the iPod (2001), iTunes (2003), the iPhone (2007), and the iPad (2010). On the strength of these new offerings, the company roared back to life in what Time magazine called “the greatest comeback in the history of business.”
Sadly, Jobs died from pancreatic cancer in October 2011. By then the business, now known as Apple Inc., had passed Exxon Mobil to become the most valuable publicly traded company on Earth. Its stock price continued to climb after his death: By January 2012, Apple had a market value of more than $393 billion.
Estimates of the present value of Ron Wayne’s original Apple stake vary depending on what assumptions are made, but all the estimates are in the billions. If he had owned 5.2 percent of Apple in early 2012, it would have been worth more than $20 billion, making him one of the 13 richest people in the United States at the time, just behind the Wal-Mart heirs and just ahead of Amazon.com founder Jeff Bezos, and Google co-founders, Sergey Brin and Larry Page. He’d also be well ahead of Steve Jobs and Steve Wozniak, who sold much of their stock in the 1980s.
Life’s a Gamble
Wayne had continued to consult with Apple after withdrawing from the partnership. He designed the first Apple logo (an image of Sir Issac Newton sitting under an apple tree), wrote the Apple I user’s manual, and helped organize an inventory system. After he left Apple, he worked a variety of jobs in government and industry. He didn’t own a computer until 1996. When he finally did get one, he bought a Dell. He didn’t own any Apple products until 2011, when an event organizer gave him an iPad 2 during a personal appearance in the United Kingdom.
By 2012, Wayne had retired and was living in the desert community of Pahrump, Nevada, 60 miles west of Las Vegas. He still makes occasional appearances at Apple events. When he’s in Pahrump, he supplements his social security income by selling rare stamps and coins from his home. For entertainment, he plays the penny slot machines in a nearby casino.
In interviews, Wayne invariably puts a brave face on his famous missed opportunity, but occasionally a twinge of regret does slip out. “Unfortunately my whole life has been a day late and a dollar short,” he told a reporter in 2010.
Join the Club
Ron Wayne wasn’t the only one to say no to a big slice of Apple. Here are a few others who made the same regrettable decision.
Hewlett-Packard. Because he built the Apple I at his cubicle in HP’s calculator division, Steve Wozniak felt obliged to offer it to the company. The calculator division didn’t want it, so an HP attorney called the heads of all the other departments and asked, “You interested in an $800 machine that can run BASIC (an early computer language) and hook up to a TV?” No one was. The lawyer drafted a letter renouncing any claim to ownership by HP and gave it to Wozniak for nothing. Later, after Wozniak finished work on the Apple II, he offered to join an HP team designing a personal computer. HP turned him down.
Haltek Surplus Electronics. Jobs offered Haltek a stake in Apple in exchange for the $15,000 in parts he needed to build the first 50 computers. No deal: The owner thought the “Scruffy-looking” Jobs and Wozniak would never succeed in business. Haltek closed its doors in 2000 after the landlord raised the rent.
Atari. When HP turned Wozniak down, Jobs offered the Apple I to Atari, but they were busy creating a home version of Pong and passed. Later, when Jobs was trying to raise the $200,000 needed to launch the Apple II, he made Atari’s founder, Nolan Bushnell, another offer: 30 percent of Apple Computer for $50,000. Bushnell said no. The Atari brand is still around, but the company is long gone. After losing $500 million in 1983, its parent company, Warner Communications, split Atari into two separate companies and unloaded them both. Both are now defunct.
Commodore Computers. After Atari said not to a 30-percent stake, Jobs tried to sell the entire company to Commodore Business Machines. Price: $100,000 in cash, plus some Commodore stock and $36,000-a-year jobs for both Jobs and Wozniak. Commodore passed on the offer and introduced its own computer in 1977. After years of losing market share to Apple and IBM PCs, Commodore filed for bankruptcy in 1994.
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Strangely missing from the list of products offered by Apple after Jobs return is the iMac in 1998. Yes, before the iPod. The introduction of the all-in-one iMac was what really started the upswing in Apple’s mindshare and profits.