Sequoia Investment in San Diego’s Service-Now.com Provides a Big Holiday Payout

12/9/09Follow @bvbigelow

It’s going to be a Merry Christmas this year for many employees at suburban San Diego-based Service-now.com, a privately held company that was founded in the aftermath of the corporate accounting scandal at San Diego’s Peregrine Systems. Perhaps merrier for some more than others.

In a regulatory filing submitted yesterday, Service-now.com discloses that it has raised almost $41.4 million in a venture round that intends to raise more than $66.1 million. Andy Chedrick, the company’s chief financial officer, tells me the entire $66.1 million investment is intended as an opportunity for all of Service-now.com’s 133 employees and founders to cash out some of their founders’ shares by selling them to Menlo Park, CA-based Sequoia Capital.

“We don’t need the round to fund our operations,” Chedrick says. “We’ve been cash-flow positive for 30 months, and we’ve been doing well.” The CFO says Service-Now.com has been doubling its revenue “year after year” and the venture round gives employees who have stock options the “ability to capitalize on their compensation.”

It wasn’t disclosed in the filing, but Chedrick tells me the investment was made by Sequoia, the venture firm renowned for its cagey investments in Google, YouTube, Cisco Systems, and others. Sequoia identifies Douglas Leone and Patrick Grady on its website as the partners who are overseeing the firm’s investment, and Leone is on Service-now’s board of directors.

But the regulatory filing also includes an unusually precise—and eyebrow-raising—notation that says: “$37,642,785.94 of the gross proceeds of the offering have been used to repurchase shares of the Company’s Common Stock held by Frederic B. Luddy, the Company’s President, CEO and director, and Andrew J. Chedrick, the Company’s CFO.”

Here at Xconomy, we have learned the hard way that the sparse information that a startup provides in a Form D filing doesn’t necessarily tell the whole story. But Chedrick refused to comment when I asked directly if the notation accurately shows a $37.6 million payout for Service-now’s CEO and CFO. Taken at face value (and with no other interpretation offered), the notation says the CEO and CFO are collecting nearly 57 percent of the $66.1 million round—or nearly 91 percent of the capital raised so far.

Nevertheless, as the Securities and Exchange Commission explains, “Form D is a brief notice that includes the names and addresses of the company’s owners and stock promoters, but contains little other information about the company.”

As we reported in February, Service-now.com was founded when the financial scandal was still burning bright at Peregrine Systems. So a big payout for Service-now’s two top executives might be galling to many people who followed the Peregrine Systems saga over the past seven years, as well as the shareholders who lost billions when Peregrine collapsed into bankruptcy in 2002.

The ensuing federal investigation resulted in 15 guilty pleas among key Peregrine figures—including CEO Stephen Gardner and CFO Matt Gless—for conspiracy, securities fraud and other federal charges. The feds uncovered a nearly three-year effort by Peregrine insiders to inflate the company’s software sales (and hide its debt and losses) to keep the company’s stock price flying high.

Luddy, who was Peregrine Systems’ chief technology officer, and his brother Rob (who had also worked at Peregrine) founded Service-now.com in 2003, after they had left Peregrine, to basically meet the same business needs that Peregrine had served when it was one of San Diego’s hottest technology stocks.

Peregrine Systems specialized in enterprise software that helps big companies and other organizations keep track of their assets, including computers, software licenses, and other equipment. Peregrine also had developed software that was installed within the firewall of corporate computer networks to help system administrators manage their “help desk” operations.

Luddy developed Service-now.com’s software to do basically do the same thing—except that instead of selling software as a product, it is designed to operate as Web-based SaaS (Software as a Service) that is maintained and updated on computers controlled by Service-now.com. As Luddy told me in 2007, “There’s almost no similarity in how the software was built or is delivered, how it performs, is maintained, and how it is paid for.”

Still, the Peregrine scandal cast a long shadow, and there are several connections between the now-defunct company and Service-now.com. One is that Service-now.com has raised about $7.5 million in venture capital from the San Diego office of JMI Equity, the private investment firm established by John Moores, who was Peregrine Systems’ biggest investor and longtime chairman. (JMI general partner Paul Barber and venture partner Charles Ramsey continue to sit on Service-Now’s board of directors.)

Moores became a lightning rod for investors’ ire throughout the Peregrine debacle because he had sold nearly his entire majority stake in Peregrine before the financial wrongdoing became public. Moores’ lawyers argued successfully, however, that he knew nothing about the fraud. That positioned was buttressed by former CEO Gardner, who testified in federal court that he had repeatedly lied to Peregrine’s board.

In a way, Luddy and Service-now have started over with a new vision of software that was well-regarded by many software industry veterans, despite Peregrine’s financial scandal. And while Luddy was a senior Peregrine executive, he has managed to convey the impression that he was in the basement writing code while others were busy exaggerating sales. The feds never charged Luddy with any criminal wrongdoing, and Chedrick never worked at Peregrine.

Under the circumstances, it’s hard to believe the Form D notation is right. But then, again, how could it be wrong?

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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