Early employees of the Internet radio service Pandora Media went for more than two years without salaries while the startup struggled to raise investment and considered casino gambling to survive, the company's founder told a gathering of entrepreneurs and investors in San Francisco late Thursday.
The Oakland, Calif., company, which makes the most popular music app for the iPhone, now has raised more than $50 million in investment and is reportedly meeting with investment bankers to plan an initial public offering of stock.
Despite the early financial hardship, an IPO may make millionaires out of many of those early workers, who were given stock options instead of cash compensation for two-and-a-half years, according to Pandora founder and chief strategy officer Tim Westergren.
The experience of those employees is a reminder of the ups and downs of life at a startup, even one that eventually finds success.
Pandora's personalized music recommendation service now has 80 million registered users and 30 million monthly listeners, according to Pandora investor and board member Jim Feuille, who spoke at the same gathering as Westergren. Those numbers are up from 30 million registered users and 12 million monthly listeners 18 months ago.
The company, originally called Savage Beast Technologies, raised its first funding round in March, 2000, at the height of the tech stock market boom. But after the boom went bust, the company was so low on cash that it asked its 50 employees to work for free so it could survive, Westergren said.
"We found that when you don't pay people, it doesn't take a lot to run a company," joked Westergren, a former musician who also wasn't paid during that time and who said he was living on "ramen and credit cards."
By the end of 2003, after two-and-a-half years in which he had met with 348 potential investors and "maxed out 12 credit cards," the employees were owed $1.5 million, he said.
Finally, in the spring of 2004, the company raised $7.8 million. In 2005, the company raised another $12 million investment round led by Crosslink Capital, where Feuille is a general partner. That funding was made contingent upon Pandora turning its service from a paid subscription business into a free one supported by advertising.
After the funding round, Westergren said he called an all-hands meeting at the company's headquarters, "similar to all the meetings in which I'd ask people to keep working for free," he said.
Instead, he began handing out checks to the employees, some of who were owed as much as $150,000.
Asked why they might have stayed around, Westergren said "they believed in what we were building."
The company has built what Pandora calls the Music Genome Project, which classifies songs by characteristics such as tempo and harmony to suggest to users music similar to what they've already requested to hear.
Westergren and Feuille, who said his company has invested $33 million in Pandora, declined to comment on reports that the company is planning an IPO.
"We plan to be a big, independent company," Westerberg said.
When asked after his talk what moment he remembered from the lean years, Westergren said the company almost turned to gambling on a roulette wheel as a method of fund raising.
"When we were down to $25,000 in the bank, we had a serious, rational discussion about going to Reno and putting it all on black. We had a 49% chance of winning, which we thought was better than the chances we would get more VC funding," Westergren said.
Write to John Shinal