This story appears in the October 19, 2014 issue of Forbes. Subscribe
How did Steve Ballmer acquire enough Microsoft stock to be near the top of The Forbes 400 list? The full story is quirkier than what appears in most Microsoft histories.
Ballmer didn't join Microsoft until 1980, four years after the software company was founded. Usually that's too late for a newcomer to get a big stake. Ballmer didn't even arrive with a big title such as president. Instead, he dropped out of Stanford Business School to become employee No. 30, with the hazily defined title of "business manager." Ballmer didn't get a single share of stock on joining. Yet an oddity in Ballmer's contract put him in a powerful position to negotiate a much better deal soon afterward.
Ballmer arrived when Microsoft was in the midst of chaotic hypergrowth. Customer lists and invoices were scattered all over. Needing help in a hurry, Microsoft cofounders Bill Gates and Paul Allen agreed to pay Ballmer not just an annual base salary of about $50,000 but also 10% of all the profit growth he could generate.
As Microsoft boomed, the math on Ballmer's likely profit slice started to escalate out of control. Meanwhile, Microsoft's first venture capitalist, Dave Marquardt, grumbled that it didn't make sense for Microsoft to keep operating as a private partnership, with Gates owning 64% and Allen holding the other 36%. Marquardt wanted Microsoft to reorganize as a corporation with wider stock ownership. The mechanics of making that switch happen didn't appeal to Gates, so Ballmer and Marquardt took charge of that project, too.
Before long, Ballmer and Marquardt presented Microsoft's founders with a proposed new capital structure. Gates and Allen would keep 84% of the company. Ballmer would get about 8%, in return for canceling his profit-sharing clause. All other employees would split the final 8%.
Bill Gates liked the proposal. Paul Allen did not. As Ballmer told FORBES, "Paul was insistent that I not get more than 5%." To make everything work out, Gates decided that an outsize majority of Ballmer's 8% stake would be funded by a drawdown of Gates' own interest. Allen agreed to contribute no more than the amount needed to get Ballmer to 5%.
When Microsoft went public in 1986, Gates and Allen still owned far more stock than Ballmer did. But over the years Gates and Allen have diversified their portfolios by selling most of their Microsoft stock. Ballmer has not. The result: The centerpiece of Ballmer's $22.5 billion fortune today is a 4% stake in Microsoft, valued at about $15.5 billion, which is $1.6 billion more than Gates' remaining holding.
Looking ahead, Ballmer says: "I'd like to own Microsoft shares until I either give something to charity or I die." --G.A.
