Cloud-gaming service OnLive reveals details behind its asset sale and new investor

After a wave of criticism about how it treated its employees, cloud-gaming service OnLive revealed details behind the sale of its assets to a newly formed company.

The new company will continue to operate under the OnLive name and offer all existing services such as the OnLive Game and Desktop Services, the OnLive Devices and Apps, and the OnLive partnerships. Those services allow users to log into a cloud-based data center to play games or use their favorite applications on low-end computers or iPads. No change is expected for users. The new announcement is aimed at curbing some of the criticism that erupted over the weekend as employees alleged that they were screwed over by founder Steve Perlman.

OnLive did not disclose the price that the new company paid for the assets, nor did it say if Perlman will be involved in the new company.

[Update: In response to a query, spokeswoman Jane Anderson said, “Steve is going to be doing what he always does. Once he’s done looking after the people, he’ll be focusing on our next product releases.” One laid-off employee who contacted us after reading the news below said it was a “bald-faced lie,” considering the laid-off employees got no severance pay or notice.]

[Update 2: Respected venture capitalist Brad Feld has just weighed in with this great post about details of the “ABC” process described below, and how the OnLive development appears to be a “pretty employee friendly approach”]

The events started on Friday morning when Perlman announced that all 200 or so OnLive employees were being laid off, the company’s assets were being transferred to a new owner, and that some of the people would be hired back. Any equity held by employees in the old organization was essentially lost.

An affiliate of Lauder Partners, an investment firm headed by Gary Lauder, is the first investor in the newly created OnLive. Lauder Partners had previously invested in OnLive in 2009. The announcement said that the old OnLive’s board of directors, faced with a difficult financial decision, decided the best course was to restructure under a California law known as “Assignment for the Benefit of Creditors.” This so-called ABC law is meant to avoid the hassles of federal bankruptcy filings. Under the ABC procedures, the board assigns a neutral party to sell off the company’s assets, including technology and intellectual property.

The assignee sold all of the assets of OnLive to the new company. Neither OnLive shares nor OnLive staff could transfer under the transaction. But “almost half” of the OnLive staff were given employee offers by the new company at their current salaries. Those who lose their jobs will be given offers to do consulting in return for options in the new group. Upon raising more funds, the new owners plan to hire more staff, including both former OnLive employees and new ones.

The OnLive service has been operating without interruption since its launch two years ago.  The company was the flagship for cloud gaming, where users connected to and played games that were stored and executed in web-connected data centers. The advantage was that OnLive could enable gamers with low-end computers to play high-end games that normally required expensive hardware. It could also enable players to enjoy “instant gratification,” Perlman said, as they could skip downloading and installing any software and just play from a remote server.

It was a revolutionary idea, and we certainly thought OnLive would turn the game world upside down when it came out of stealth in 2009. It was one of the most ambitious game startups ever created, and in the end it looks like it didn’t get enough traction.

At one point, OnLive was valued at $1.8 billion. If it had executed better on its plans to recruit gamers across the world to pay for its instant-play subscription service, that valuation wouldn’t have been considered crazy. But the company never disclosed how many subscribers it had. And despite many announced partnerships, it was never clear how many people were using the service. Tonight, the company said it had 2.5 million subscribers overall, with an active base of 1.5 million subscribers. That’s not many, considering the service has been available for two years.

One of the problems was that game publishers were wary about OnLive’s position as a new kind of middleman in between them and consumers. Some game makers such as Electronic Arts preferred to create their own online distribution services and work with rival Gaikai, which offered a white-label cloud gaming service to all comers. OnLive’s offerings grew, but it never managed to score huge exclusives. That was because publishers, who are still heavily dependent on physical sales, couldn’t afford to take the risk of angering traditional retailers and giving exclusives to OnLive.

OnLive steadily expanded, launching in the United Kingdom and Belgium, and it also diversified beyond games to launch an enterprise cloud service. That enabled users to use heavy-duty programs such as Microsoft Office via cloud connections on devices such as Apple iPads.

OnLive’s problems got a little tougher when Sony bought Gaikai for $380 million. That was a fine outcome for the OnLive rival, which didn’t raise as much money as OnLive (OnLive never mentioned how much it actually raised). But the price for Gaikai was pretty low when compared to OnLive’s aspirations. OnLive had raised money at a valuation that was perhaps $1 billion to $1.5 billion. For investors who came in during the most recent round of funding, selling out at a price similar to Gaikai’s would have resulted in a big loss. And for founder Perlman, selling at a low price would have been an admission of defeat.

The old OnLive had been working on its instant-gaming technology for more than a decade. The company said the “asset acquisition, although a heartbreaking transition for everyone involved with OnLive, allows the company’s core innovation and ongoing offerings to survive and continue to evolve.”

Over the weekend, stories emerged that alleged that Perlman and the executive team, as well as investors, would get their equity back in some way, but the laid-off employees would not. But the company said today that the old OnLive shares held by investors, employees, and executives are all wiped out. “Steve is receiving no compensation whatsoever, and most execs are receiving reduced compensation to allow the company to hire as many employees as possible within the current budget,” the announcement said. No assets were transferred to any other company except the new OnLive.

In response to a question, OnLive clarified the intellectual property transfer. OnLive was incubated within Perlman’s Rearden think tank for more than five years. It spun out in 2007 and received its first outside investment at that time. A hundred percent of the intellectual property was transferred to the spinout in 2007, so Rearden no longer owns any rights to the patents. OnLive said, “The rumors that Rearden has retained ownership of patents are utterly false, and any competent patent attorney can verify that.”

Given “wide speculation,” OnLive released a FAQ to go with the announcement:

Q. Will users see any change in the OnLive Game or Desktop Services? What about their purchases?

A. Users should see no change in the OnLive Game or Desktop Services. All of their purchases remain intact and available. OnLive has been up 24/7 since launch over two years ago and expects to remain so. OnLive has over 2.5 million subscribers, with an active base of over 1.5 million subscribers, connecting from a vast range of devices and networks, with many sessions running for hours. The user base is growing rapidly with OnLive’s addition into recently announced devices and TVs from major manufacturers. We expect this growth to continue under the new company.

Q. Is there any cash or stock in the new company provided for any OnLive, Inc. shares?

A. Unfortunately not. The nature of the transaction is such that only assets, not shares, were purchased. This is true for all shares of OnLive, Inc., whether held by investors, employees or executives.

Q. Did Steve Perlman receive stock or compensation in this transaction?

A. Like all shareholders, neither Steve nor any of his companies received any stock in the new company or compensation in this transaction at all. Steve is receiving no compensation whatsoever and most execs are receiving reduced compensation to allow the company to hire as many employees as possible within the current budget.

Q. Did all OnLive, Inc. assets transfer into the new company? Are any assets held by any other party?

A. All of OnLive, Inc.’s assets (e.g. technology, patents, trademarks, etc.) were transferred to an assignee, which then sold the assets to the new company. There was no transfer to any other party.

Q. Have OnLive, Inc. employees been offered positions in the new company?

A. Almost half of OnLive’s staff were offered employment at their current salaries in the new company immediately upon the transfer, and the non-hired staff will be given offers to do consulting in return for options in the new company. Upon closing additional funding, the company plans to hire more staff, both former OnLive employees as well as new employees.