Gates' Attempt to Buy Out Microsoft Co-Founder Paul Allen at $5 per Share Fails, Allen Retains Shares and Becomes Wealthy
Microsoft co-founder Paul Allen revealed in his autobiography "Idea Man" that after undergoing treatment for Hodgkin's lymphoma in December 1982, he overheard Bill Gates and Steve Ballmer discussing diluting his shares through a stock option issuance, citing his recent lack of contributions.
Allen confronted the two in their office, stating that this exposed their true character; they later apologized, but the dilution plan was halted, and Allen decided to leave the company. At that time, he held about 36% of the shares, and Gates offered to buy out all shares at $5 per share, which Allen refused, stating he wouldn't discuss anything below $10 per share. Gates rejected this price, and the deal fell through.
Allen did not sell any shares when he left Microsoft; in March 1986, Microsoft went public at $21 per share, and the stock price continued to rise, with Allen's retained original shares ultimately making him a billionaire, allowing him to purchase assets such as sports teams, aerospace, and yachts.
In the book, Allen wrote that Gates' conservatism actually benefited him; had Gates been willing to pay closer to his asking price, he would have sold his shares too early. The two met at Lakeside School in Seattle, dropped out together to start Microsoft, and their early equity shifted from nearly equal to Gates having the advantage.
This event occurred during the early days of the personal computer wave, as Microsoft's business was taking off; the failed buyout allowed Allen to fully retain his early shares, transitioning his capital from a one-time low-price liquidation to a long-term hold to enjoy subsequent growth.
Allen stated that trust was shattered, and after leaving, he focused on other ventures; Gates responded by saying that while he remembers many events differently, he values his friendship with Allen and his contributions to technology and Microsoft.
Source: Public Information
ABAB AI Insight
Gates and Allen collaborated from high school to co-found Microsoft, with equity adjustments (from nearly equal to 64/36); after hearing the dilution discussion during his illness in 1982, Allen decided to leave; Gates then attempted a low buyout at $5, which failed.
In terms of capital, Allen insisted on a $10 bottom line but ultimately retained about 36% of his shares until the IPO and subsequent decades of appreciation; his motivation was to reject a low-priced liquidation of a business that was taking off, resulting in a transformation from a one-time exit to long-term equity appreciation.
Similar cases include other early tech founders who missed subsequent growth due to low-priced exits from health issues or disagreements (or retained shares to become long-term beneficiaries); currently, there is a classic structure of price misalignment in early equity negotiations versus future value.
Essentially, this involves pricing power and information asymmetry: sellers demand a price close to fair future expectations, while buyers refuse due to short-term cost considerations, causing equity to shift from potential liquidation to long-term holding; a single refusal to pay an additional $5 transformed one party's wealth path from exit to holding until post-IPO exponential growth.
ABAB News · Cognitive Laws
A key step of not paying an extra $5 may allow the other party to retain equity for a lifetime
A failed low-price buyout can sometimes benefit the holder more than a successful buyout
Trust can be broken and one can leave, but retaining shares allows for future growth