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THREE

Apple Envy

For a young entrepreneur building a business in the heart of Silicon Valley, it was hard to escape the shadow of Steve Jobs. By 2007, Apple’s founder had cemented his legend in the technology world and in American society at large by bringing the computer maker back from the ashes with the iMac, the iPod, and the iTunes music store. In January of that year, he unveiled his latest and biggest stroke of genius, the iPhone, before a rapturous audience at the Macworld conference in San Francisco.

To anyone who spent time with Elizabeth, it was clear that she worshipped Jobs and Apple. She liked to call Theranos’s blood-testing system “the iPod of health care” and predicted that, like Apple’s ubiquitous products, it would someday be in every household in the country.

In the summer of 2007, she took her admiration for Apple a step further by recruiting several of its employees to Theranos. One of them was Ana Arriola, a product designer who’d worked on the iPhone.

Ana’s first meeting with Elizabeth was at Coupa Café, a hip coffee and sandwich place in Palo Alto that had become her favorite haunt outside the office. After filling her in on her background and her travels to Asia, Elizabeth told Ana she envisioned building a disease map of each person through Theranos’s blood tests. The company would then be able to reverse engineer illnesses like cancer with mathematical models that would crunch the blood data and predict the evolution of tumors.

It sounded impressive and world changing to a medical neophyte like Ana, and Elizabeth seemed brilliant. But given that Ana would be leaving behind fifteen thousand Apple shares if she joined Theranos, she wanted to get her wife Corrine’s opinion. She arranged to meet Elizabeth again in Palo Alto, this time with Corrine present. Any hesitations she had were put to rest when Elizabeth made a big impression on Corrine too.

Ana joined Theranos as its chief design architect. This mostly meant she was responsible for the overall look and feel of the Edison. Elizabeth wanted a software touchscreen similar to the iPhone’s and a sleek outer case for the machine. The case, she decreed, should have two colors separated by a diagonal cut, like the original iMac. But unlike that first iMac, it couldn’t be translucent. It had to hide the robotic arm and the rest of the Edison’s innards.

She’d contracted out the case’s design to Yves Béhar, the Swiss-born industrial designer whose reputation in the Valley was second only to Apple’s Jony Ive. Béhar came up with an elegant black-and-white design that proved difficult to build. Tony Nugent and Dave Nelson spent countless hours molding sheet metal in an attempt to get it right.

The case wouldn’t conceal the loud noises the robotic arm made, but Ana was satisfied that it would at least make the device presentable when Elizabeth took it out on demos.

Ana felt that Elizabeth could use a makeover herself. The way she dressed was decidedly unfashionable. She wore wide gray pantsuits and Christmas sweaters that made her look like a frumpy accountant. People in her entourage like Channing Robertson and Don Lucas were beginning to compare her to Steve Jobs. If so, she should dress the part, she told her. Elizabeth took the suggestion to heart. From that point on, she came to work in a black turtleneck and black slacks most days.

Ana was soon joined at Theranos by Justin Maxwell and Mike Bauerly, two other recruits hired to work on the design of the Edison’s software and other parts of the system that patients would interact with, like the packaging for the cartridges. Ana and Justin had worked together at Apple and knew Mike through his girlfriend, who had been a colleague of theirs there. It wasn’t long before the Apple transplants began noticing that Elizabeth and Theranos had their quirks. Ana would arrive early every morning for a daily seven-thirty meeting with Elizabeth to update her on design issues. When she pulled her car into the parking lot, Ana would find her jamming to loud hip-hop music in her black Infiniti SUV, the blond streaks in her hair bouncing wildly.

One day, as Justin walked into her office to update her on a project, Elizabeth motioned him over excitedly, saying she wanted to show him something. She pointed to a nine-inch-long metal paperweight on her desk. Etched on it was the phrase, “What would you attempt to do if you knew you could not fail?” She’d positioned it so the words were facing her and clearly found it inspiring.

Having an idealistic boss wasn’t a bad thing, but there were other aspects of working at Theranos that were less pleasant. One of them was having to do daily battle with Matt Bissel, the head of IT, and his sidekick, Nathan Lortz. Bissel and Lortz had the company’s computer network set up in such a way that information was split into silos, hampering communication between employees and departments. You couldn’t even exchange instant messages with a coworker. The chat ports were blocked. It was all in the name of protecting proprietary information and trade secrets, but the end result was hours of lost productivity.

The situation got so frustrating that Justin stayed up late one night and wrote a long email screed to Ana about it.

“We have lost sight of our business objective. Did this company set out to ‘put a bunch of people in a room and prevent them from doing illegal things,’ or did it set out to ‘do something amazing with the best people, as quickly as possible’?” he fumed.

Justin and Mike also got the distinct impression that Bissel and Lortz were spying on them and reporting their findings back to Elizabeth. The IT team always wanted to know what programs they were running on their computers and at times turned suspiciously friendly in what felt like transparent attempts to elicit seditious gossip. The snooping wasn’t confined to the IT guys. Elizabeth’s administrative assistants would friend employees on Facebook and tell her what they were posting there.

One of the assistants kept track of when employees arrived and when they left so that Elizabeth knew exactly how many hours everyone put in. To entice people into working longer days, she had dinner catered every evening. The food often didn’t arrive until eight or eight thirty, which meant that the earliest you got out of the office was ten.

The strange atmosphere got even stranger when the Theranos board convened once a quarter. Employees were instructed to appear busy and not to make eye contact with the board members when they walked through the office. Elizabeth ushered them into a big glass conference room and pulled down the shades. It felt like CIA agents conducting secret debriefings with an undercover operative.

ONE EVENING, Ana gave Justin and Aaron Moore, one of the engineers, a ride back to San Francisco. Aaron had dropped out of a Ph.D. program in microfluidics at MIT and come to work at Theranos in September 2006 after spotting a small job ad in a trade publication. He’d worked at the company nearly a year by the time Ana and Justin came on board. Aaron was smart enough to have gone to college at Stanford and grad school at MIT, but he didn’t take himself too seriously. He was originally from Portland, Oregon, and had the Portlandian hipster’s look: shaggy hair, a three-day beard, and earrings. He was also witty, all of which made him the one person at Theranos the Apple transplants could relate to.

Ana, Justin, and Aaron all lived in San Francisco and commuted by car or train to the office. During their drive home that evening, Aaron shared some gripes he had with his new colleagues as they sat in traffic in Ana’s Prius. In case they hadn’t noticed yet, people were constantly getting fired at Theranos, Aaron told them. Ana and Justin had definitely noticed. The Ed Ku layoffs had just taken place. In addition to Ed, twenty other people had lost their jobs. It happened so fast that Ed had left a bunch of work tools behind, including a nice set of X-Acto precision cutting knives that Justin had fished out of a wastebasket and claimed as his own.

Aaron mentioned that he was also troubled by the study with cancer patients in Tennessee. They’d never gotten the microfluidic system anywhere close to working properly and certainly not well enough to use on live patients, and yet Elizabeth had pushed ahead with the study. The shift to the new machine Tony built was an improvement, but Aaron felt they still didn’t have a good read on its performance. The engineering and chemistry groups weren’t communicating. Each was running tests on the parts of the system it was responsible for, but no one was conducting overall system tests.

Ana listened with rising unease. She’d assumed Theranos had perfected its blood-testing technology if it was going to be used on patients. Now Aaron was telling her it was still very much a work in progress. Ana knew the Tennessee study involved people dying of cancer. It bothered her to think they might be used as guinea pigs to test a faulty medical device.

What Ana and Aaron didn’t know and what might have allayed their concerns somewhat is that the test results Theranos generated from the cancer patients’ blood would not be used to make any changes to their treatments. They were to be used only for research purposes, to help Pfizer assess the effectiveness of Theranos’s technology. But that was never clear to most Theranos employees because Elizabeth never explained the terms of the study.

The next morning, Ana reached out to the person who’d introduced her to Theranos: her former Apple colleague Avie Tevanian. Avie was on Theranos’s board of directors. He was the one who’d put out feelers to Ana several months earlier and arranged for her to meet Elizabeth. Ana met Avie at a Peet’s Coffee in Los Altos and mentioned what she’d learned from Aaron Moore. She worried that Theranos was crossing an ethical line with the Tennessee study. Avie listened intently and told Ana he was beginning to have doubts of his own about the company.

AVIE WAS ONE of Steve Jobs’s oldest and closest friends. They’d worked together at NeXT, the software company Jobs created after being ousted from Apple in the mid-1980s. When Jobs returned to Apple in 1997 he’d brought Avie over with him and made him the head of software engineering. A grueling decade later, Avie had called it quits. He’d made more money than he knew what to do with and wanted to enjoy more time with his wife and two kids. A few months into his retirement, a headhunter recruiting new directors for Theranos had approached him.

Like Ana, Avie’s first meeting with Elizabeth had been at Coupa Café. She’d come across as a bright young lady who was passionate about what she was doing, exactly the qualities you looked for in an entrepreneur. Her eyes had lit up when he volunteered some pieces of management wisdom he’d learned at Apple. His long association with Jobs seemed an object of fascination to her. After their encounter, Avie had agreed to join the Theranos board and bought $1.5 million of company stock in its late 2006 offering.

The first couple of board meetings Avie attended had been relatively uneventful, but, by the third one, he’d begun to notice a pattern. Elizabeth would present increasingly rosy revenue projections based on the deals she said Theranos was negotiating with pharmaceutical companies, but the revenues wouldn’t materialize. It didn’t help that Henry Mosley, the chief financial officer, had been fired soon after Avie became a director. At the last board meeting he’d attended, Avie had asked more pointed questions about the pharmaceutical deals and been told they were held up in legal review. When he’d asked to see the contracts, Elizabeth had said she didn’t have any copies readily available.

There were also repeated delays with the product’s rollout and the explanation for what needed to be fixed kept changing. Avie didn’t pretend to understand the science of blood testing; his expertise was software. But if the Theranos system was in the final stages of fine-tuning as he’d been told, how could a completely different technical issue be the new holdup every quarter? That didn’t sound to him like a product that was on the cusp of commercialization.

In late October 2007, he attended a meeting of the board’s compensation committee. Don Lucas, the board’s chairman, told the committee members that Elizabeth planned to create a foundation for tax-planning purposes and wanted the committee to approve a special grant of stock to it. Avie had noticed how much Don doted on Elizabeth. The old man treated her like a granddaughter. A portly gentleman with white hair who liked to wear broad-brim hats, Don was in his late seventies and was part of an older generation of venture capitalists who approached venture investing as if it were a private club. He’d mentored one famous entrepreneur in Larry Ellison. In Elizabeth, he clearly thought he’d found another.

Except Avie didn’t think it was good corporate governance to do what Elizabeth wanted. Since she would control the foundation, she would also control the voting rights associated with the new stock, which would increase her overall voting stake. Avie didn’t think it was in other shareholders’ interest to give the founder more power. He objected.

Two weeks later, he received a call from Don asking if they could meet. Avie drove to the old man’s office on Sand Hill Road. Elizabeth was really upset, Don informed him when he got there. She felt he was behaving unpleasantly during board meetings and didn’t think he should be on the board anymore. Don asked if he wanted to resign. Avie expressed surprise. He was just fulfilling his duties as a director; asking questions was one of them. Don agreed and said he thought Avie was doing an excellent job. Avie told Don he wanted to take a few days to think things over.

When he got back to his house in Palo Alto, he decided to go back and look at all the documents he’d been given over the previous year as a board member, including the investment materials he’d received before he bought his shares. As he read them over, he realized that everything about the company had changed in the space of a year, including Elizabeth’s entire executive team. Don needed to see these, he thought.

IN THE MEANTIME, Ana Arriola was getting antsy. Ana was by nature excitable. She spoke quickly and was a constant whirlwind of activity. Most of the time, it was positive energy that she channeled into her work to great effect. But at times it could also turn into stress, anxiety, and drama.

After their coffee, she’d stayed in contact with Avie and had learned from her former Apple colleague that Elizabeth wanted him off the board. She didn’t know what had prompted their rift, but it was an ominous development.

Ana’s own relationship with Elizabeth was deteriorating. Elizabeth didn’t like being told no, and Ana had done so on several occasions when she’d found a demand Elizabeth made unreasonable. She was also getting put off by her secrecy. A designer might not be as crucial to this little enterprise as an engineer or a chemist, but she still needed to be in the information loop about the product’s development to do her job properly. Yet Elizabeth kept Ana on a need-to-know basis.

During one of their early morning meetings, Ana confronted Elizabeth with what she’d heard from Aaron Moore about problems with the Theranos system. If they were still working out kinks in the technology, wasn’t it preferable to put the Tennessee study on pause and concentrate on fixing the problems first? They could always restart it once they got the machine working reliably, she told her.

Elizabeth flatly rejected the idea. Pfizer and every other big drugmaker wanted her blood-testing system and Theranos was going to be a great company, she said. If Ana wasn’t happy, then perhaps she should reflect on whether this was the right place for her.

“Think about it and then tell me what you want to do,” she said.

Ana went back to her desk and stewed for several hours. She couldn’t shake the thought that forging on with the Tennessee study wasn’t the right thing to do. The fact that Elizabeth wanted Avie to leave the board was also unsettling. Ana trusted Avie and considered him a friend. If Avie and Elizabeth had a beef, she was inclined to side with Avie.

By midafternoon, Ana had made up her mind. She wrote up a brief resignation letter and printed out two copies, one for Elizabeth and one for HR. Elizabeth was out of the office by then, so she slipped the letter under her door. On her way out, she typed out a quick email to let her know where to find it.

Elizabeth emailed her back thirty minutes later, asking her to please call her on her cell phone. Ana ignored her request. She was done with Theranos.

DON LUCAS DIDN’T USE EMAIL. He’d seen his share of litigation over the years, including a wave of class-action lawsuits targeting Oracle in the early 1990s, and didn’t like the idea of leaving behind an electronic paper trail that might one day be used against him in court. If Avie wanted Don to see what he’d found, he’d have to show it to him in person. He reached out to Don’s two assistants and set up another meeting.

On the appointed day, Avie showed up at Don’s office with hard copies of all the documents he had been given as a Theranos director. It amounted to hundreds of pages. Taken together, they betrayed a series of irreconcilable discrepancies, he told Don. The board had a problem on its hands, he said. It was possible Theranos could be fixed, but it wasn’t going to happen the way Elizabeth was managing things. He suggested they bring in some adult supervision.

“Well, I think you should resign,” Don replied. He quickly added, “What are you planning to do with that stack of papers?”

Avie was taken aback. Don didn’t even seem interested in hearing him out. The older man seemed concerned only with whether he was going to escalate the matter to the full board. After turning the situation over in his mind for a few moments, Avie decided to stand down. He’d retired from Apple for a reason. He didn’t need the aggravation.

“OK, I’ll resign and I’ll leave these papers with you,” he said.

As Avie got up to leave, Don said there was something else they needed to discuss. Shaunak Roy, Theranos’s first employee and de facto cofounder, was leaving the company and selling most of his founder’s shares back to Elizabeth. She needed the board to waive the company’s rights to repurchase the stock. Avie didn’t think that was a good idea but told Don to have the board vote the motion without him since he was resigning.

“One more thing, Avie,” Don said. “I need you to waive your own rights to buy the shares.”

Avie was starting to get ticked off. He was being asked to put up with a lot. He told Don to have Michael Esquivel, Theranos’s general counsel, send over the requisite documents. He would review them but made no promises.

When the documents arrived, Avie read them carefully and concluded that, once the company itself waived its rights to repurchase Shaunak’s shares, it was entirely within his and other shareholders’ rights to buy some of them. He also noticed that Elizabeth had negotiated a sweetheart deal: Shaunak was willing to part with his 1.13 million shares for $565,000. That translated to 50 cents a share, an 82 percent discount to what he and other investors had paid more than a year earlier in Theranos’s last funding round. Some discount was warranted because Avie’s shares were preferred shares with higher claims on the company’s assets and earnings while Shaunak’s shares were common ones, but a discount that big was unheard of.

Avie decided to exercise his rights and told Esquivel he wanted to acquire the pro-rata portion of Shaunak’s stock he was entitled to. The request did not go down well. A tense email exchange ensued between the two men that stretched into the Christmas holiday.

At 11:17 p.m. on Christmas Eve, Esquivel sent Avie an email accusing him of acting in “bad faith” and warned him that Theranos was giving serious consideration to suing him for breach of his fiduciary duties as a board member and for public disparagement of the company.

Avie was astonished. Not only had he done no such things, in all his years in Silicon Valley he had never come close to being threatened with a lawsuit. All over the Valley, he was known as a nice guy. A teddy bear. He didn’t have any enemies. What was going on here? He tried getting in touch with other members of the board, but none would respond to his calls.

Unsure what to do, Avie consulted a friend who was a lawyer. Thanks to his Apple wealth, his personal balance sheet was bigger than Theranos’s, so the prospect of costly litigation didn’t really scare him. But after he filled his friend in on everything that had happened, the friend asked a question that helped him put the situation in perspective: “Given everything you now know about this company, do you really want to own more of it?”

When Avie thought about it, the answer was no. Besides, it was the season of giving and rejoicing. He decided to let the matter rest and to put Theranos behind him. But before doing so, he wrote a parting letter to Don and emailed it to his assistants, along with a copy of the waiver the company had pressured him to sign.

The brutal tactics used to get him to sign the waiver, he wrote, had confirmed “some of the worse concerns” he’d raised with Don about the way the company was being run. He didn’t blame Michael Esquivel, he added, because it was clear the attorney was just acting on orders from above. He closed the letter with

I do hope you will fully inform the rest of the Board as to what happened here. They deserve to know that by not going along 100% “with the program” they risk retribution from the Company/Elizabeth.

Warmly,

Avie Tevanian

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