Stop Thief! Compaq Files Charges Against RLX Technologies

Despite having successfully landed $40 million in venture financing just last week, it might be a while before Web server start-up RLX Technologies Inc. has an opportunity to spend its newfound dough. On Friday, a Texas state district judge slapped the Houston-based company with a temporary restraining order from Compaq Computer Corp., which alleges that RLX is using the computer giant?s trade secrets to develop a new computer server.

The complaint accuses RLX of selectively poaching several high-ranking Compaq employees for the purpose of misappropriating trade secrets, including some regarding a new computer server Compaq is allegedly developing.

“[RLX] is a very small company with a large number of Compaq employees, and despite their best intentions, it?s virtually incomprehensible that they wouldn?t use [our] trade secrets to deploy technology Compaq is implementing today and plans to implement tomorrow,” said Rick Becker, director of software marketing and business development for Compaq?s industry standard service group.

He also said that RLX?s hiring practices were “focused and predatory.”

For its part, RLX Technologies vehemently denies any wrongdoing.

“Compaq is trying to defocus the management team and slow down our development process,” said Kevin Bohren, a spokesman for the start-up. “The complaint has no merit and we plan to fight it vigorously.”

Bohren added that it?s going to be business as usual at RLX unless a court decides otherwise. “The restraining order the judge has invoked says our employees can?t talk about trade secrets, but we?re going to continue because we weren?t doing that anyway.”

Texas District Judge Scott Link issued the restraining order, and state District Judge Patrick Mizell will preside over a hearing March 5 that will decide whether the court will grant a temporary injunction against RLX.

Legal Defense Fund?

Even though its first server product – code named Razor – isn’t slated to hit the market until the second quarter, investors validated RLX?s business model last week by pumping $40 million into the company.

Newcomer Soros Private Equity Partners LLC led the pack on the Series B financing, with IBM Corp. and Ignition Corp. also signing on. Additional participants included Series A investors ComVentures and Sternhill Partners, which both exercised their pre-emptive rights in the transaction.

Soros is no stranger to the Web-server space. Last November, the firm also led a $100 million Series B financing for enterprise software outsourcing start-up Jamcracker Inc.

Soros Partner Chris Michalik received an RLX board seat as part of the recent transaction.

Impressive Performance History

When RLX set out to raise its first round of financing last fall, the company’s prospectus somehow found its way into the hands of Gary Stimac via a VC contact.

“I didn’t believe in business plans, but I saw [RLX’s] and I thought to myself, if they can do half of what they say, they can deliver,” he recalled.

In fact, he was so impressed by the company’s product and its budding management team that he accepted a board position and agreed to help RLX build its cadre of senior leaders. Stimac, a 16-year veteran of Compaq Computer Corp., soon volunteered to take over RLX’s helm as well.

Once the senior management team was on board, Stimac looked at the company’s Series A

valuation – originally set by Soros before the team was in place – and agreed to do the first round despite the fact that he felt the terms were none too generous. In addition to ComVentures and Sternhill Partners, Stimac bet some of his own money on the company and called on a few old friends to participate as angel investors. In December, RLX closed on a grand total of $12.75 million. Soros ultimately chose to sit out the first round, Stimac said.

Despite the fact that the first-round infusion would likely keep the company afloat until the middle of this year, Stimac immediately starting pounding the pavement to keep the cash flowing.

“I expected to make hundreds of visits and spend at least three months doing a road show because the market is so difficult,” he said. As it turns out, that wasn’t the case. Halfway through one of his first presentations, which happened to be for Soros, a principal at the firm stopped him and said they would write Stimac a check that afternoon.

Surprised by the offer, Stimac told Soros to hold off and made a few phone calls. When all was said and done, RLX accepted just 50% of Soros’ original offer. With the other investors on board, the round ended up being oversubscribed two or three times over, he said.

The overwhelming investor interest may well be a blessing in disguisein a shrinking VC market, as this latest financing should tide the company over for at least the next five quarters, Stimac added. He also said that RLX may not tap the private equity well again, although it’s still too early to tell what the company’s financial needs will be next year.

A Port In The Power Storm

Certainly, if the company’s well-laid plans don’t go awry, it may soon find itself giving competitors like Sun Microsystems Inc. and Intel Corp. a run for their money. Essentially, RLX has married its technology with Transmeta Corp.’s new Crusoe microprocessor. As such, it plans to target the fast-growing data center market by offering high density servers that conserve wattage and space, two of the most crucial factors for data center owners. And, as power becomes increasingly harder to come by, Stimac anticipates that RLX’s technology will be in heavy demand.

“Data centers are all around us,” he said. “[And particularly] in Asia and Europe, power is expensive and [conserving] weight and space are important as companies build out their Internet data centers because of strict building structures and codes.”

Still, it may be a while before RLX makes its way across the Atlantic or into the Far East, as it plans to focus most of its efforts on ratcheting up its U.S. presence for the first half of 2001.

Pending the launch of its product later this year, RLX intends to use its most recent capital infusion to bolster its sales and marketing activities and grow its payroll by 50%. The company currently has 80 employees.

Robyn Kurdek can be contacted at Story Feedback.