MeVC took the lofty idea of making venture capital public and dragged it through the gutter.

It seemed like a brilliant idea at the time. The year was 1999, and Wall Street worshipped all things venture. Newly public tech stocks shot up instantly in aftermarket trades. Individual investors clamored for access to the deals spun out of Silicon Valley’s Sand Hill Road venture capital country club. So an accountant, an investment banker and a research analyst decided that what the world needed was a publicly traded venture capital fund. They dubbed their creation MeVC.com.

But instead of a refreshing democratic inroad into the private world of venture, MeVC has become a very embarrassing public display of bad judgment and back-scratching. Investors have brought two lawsuits against MeVC’s former chairman, John M. Grillos, and his partners. The Securities & Exchange Commission is looking into a $3 million loan to a shell company and the questionable assumption of a $300,000-a-year lease liability.

No surprise, given the Nasdaq collapse, that only one of the fund’s 30 investments has risen in value. Half of the $330 million raised by the initial offering in March 2000 has vanished. What’s left is $111 million in cash and short-term debt and $45 million in 20 flea-bitten startups. At $8.40, the shares trade 60% below the offering price and 13% below the putative net asset value.

A group of angry hedge funds seized control in March and fired Grillos. Eager to get some juice from this lemon, the board will put to a shareholder vote both a tender offer for 25% of the outstanding shares at what would now be $9.15 a share and the hiring of Michael Tokarz, a former Kohlberg Kravis Roberts financier, to run MeVC. He would then invest the cash in older, private nontech firms.

Grillos defends his decisions, saying he was in the wrong place at the wrong time. “The environment got extremely ugly, and I couldn’t implement our strategy,” he says. “It wasn’t like a bunch of crooks were trying to skin the public.”

But the public got skinned anyway. None of MeVC’s early leadership–banker Andrew Singer, research analyst Peter Freudenthal and accountant Paul Wozniak–had ever led a venture deal. That didn’t stop Timothy Draper, a well-reputed VC running Draper Fisher Jurvetson in Silicon Valley, from buying in. The concept was that a privately held parent firm, MeVC.com, would run a series of investment funds that would be offered to the public. Draper invested $4.5 million of his firm’s money in the parent and joined as chairman of the first–and what turned out to be the only–fund, MeVC Draper Fisher Jurvetson Fund I. Draper stepped down when he and his partners picked Grillos to run the fund. Grillos, then 56, had an electrical engineering background, with an M.B.A. from the University of Chicago. He had been chief operating officer of SmartForce, an educational software company, and had had venture experience at Robertson Stephens. Prior to coming to MeVC he ran a $5 million angel fund.

MeVC took a fatal blow before it even got in the ring. Its mass appeal was based on its ability to invest in the best companies seeded earlier by the hot hands at Draper Fisher Jurvetson, but that depended on getting an unprecedented exemption from an SEC rule prohibiting affiliated parties from influencing one another’s investments. Fund I went public while waiting for SEC approval, and thousands of individuals bought in at $20 a share three weeks before the crash in April 2000. Four months later the SEC denied MeVC’s request to invest in follow-on rounds of DFJ deals, while permitting MeVC and DFJ to invest at the same time and on the same terms. But after tech swooned, few VCs were in the mood to share anything.

Left to his own devices, Grillos made some lousy calls. Of the 30 companies he backed in his three-year tenure, 10 were shuttered; all but one were written down. By December 2000 MeVC was trading at 91 cents on the dollar. Arbitrage funds moved in. Robert Knapp, managing director of Millenco, a New York-managed hedge fund, began building a 7% position.

In mid-2001 Grillos complained to the MeVC.com board that he needed more staff to dig up deals, as well as a bigger cut of the fund’s take. The way MeVC was set up, two groups had claim to the fund’s 2.5% management fee: MeVC Advisers, which provided back- office services and paid the bills, and Draper Advisers, which did the investing. Grillos led Draper Advisers, which pulled in 40% of the fee. MeVC Advisers, led by two of the founders, got the other 60%. Grillos thought he deserved 50%, but MeVC Advisers refused to give in. “We had a bloody brawl,” says Grillos.

He invested in 2 new companies in 2001, down from 16 in 2000, yet paid himself a $150,000 bonus and a $600,000 salary. When Draper found out, he sent Grillos a flaming e-mail, telling him he was “biting the hand that feeds” him and insisting he return the money. “I was never about to pay any money back,” says Grillos. “The only ones who could say anything were my directors, and they didn’t ask for it.” Draper won’t comment.

In March 2002 Grillos tried to increase his share of the fee by submitting a proxy that he hoped would slip by as “routine,” meaning brokerage firms vote on shareholders’ behalf, usually in favor of management. But days before the vote Millenco’s Knapp alerted the New York Stock Exchange and overnighted a letter to other investors saying Grillos was taking away their rights. Hours before the meeting the NYSE said the proxy was nonroutine, requiring shareholders to cast their own votes. Grillos lost.

In May Grillos’ lawyers sent the board of the publicly traded fund a proposal that would allow him to internally manage the fund, rendering MeVC Advisers powerless. The board didn’t go for it. A month later MeVC Advisers received a $400,000 legal bill. They didn’t have the money. Fearing that paying that and other debts would force them to withdraw more than the maximum fee of 2.5%, the founders resigned. The rest of the MeVC Advisers resigned the next day, triggering the resignation of Draper Advisers. The board, packed with Grillos loyalists, put him in charge.

In August, sick of what it called “the board’s contempt for shareholders,” Millenco filed suit in Delaware chancery court to void the election of two Grillos cronies on the board. The two directors were top executives at Evineyard, an online wine merchant that Grillos had backed in two of his prior funds–a fact he never disclosed to shareholders. (Grillos had earlier tried to invest in Evineyard with MeVC funds–also something he never told shareholders.)

Despite the growing scrutiny, in October Grillos hired another buddy as president, William (Boots) Del Biaggio, a 36-year-old venture debt financier he’d met on an earlier deal. Del Biaggio would lead the fund’s new loanmaking strategy. Del Biaggio’s last fund, Sand Hill Capital II, was burdened by its own debt and returned -50% over three years.

Their first decision as a team was to move into new digs on Sand Hill Road. As it happened, MeVC took over a space at the same address as Del Biaggio’s old fund. The new rental payment, $300,000 a year for the next three years, was ten times the going rate in nearby towns, but close to the amount Del Biaggio was reportedly paying for his fund’s overhead costs. Del Biaggio insists there was nothing unethical: “Being on Sand Hill was like a marketing expense.”

Grillos’ problems mounted. In November SmartForce, where he served as chief operating officer, restated three and a half years of filings, starting in 1999. A class action followed. Grillos says he left the firm before the books were cooked but he was a director until September 2002.

In mid-December the Delaware court ruled in Millenco’s favor to ax Grillos’ two board appointees. Millenco’s next step was to build its own slate of directors and put both to a shareholder vote at the annual meeting in February. Grillos kept on investing: He arranged $20 million in debt deals in December, including $3 million to a shell company, BS Management, located on the Isle of Man, that was supposed to invest the funds in another firm.

The final proxy battle began in January as Grillos and Knapp each proposed a slate of directors. Grillos sued the opposing shareholders for conspiring to raid the fund. A judge dismissed that suit four days before investors voted out Grillos’ board 4-to-1. “Charles Manson and O.J. Simpson could have run against Grillos and I would have voted for them, if they closed the discount,” says shareholder Phillip Goldstein of Opportunity Partners.

On Mar. 3, days after an early vote count showed he’d lost the election, Grillos modified terms of the $3 million Isle of Man loan, delaying the repayment date and, Knapp says, making it possibly uncollectable. Grillos says this will be the best investment he has made at MeVC.

Knapp is suing to reclaim the $3 million. Meanwhile, MeVC shareholders are on the hook for $4 million in legal fees run up by both past and present management. Grillos is mulling his future. “I did what I said I was going to do. People could say I was a moron, but I didn’t want them to think I wasn’t a standup guy. This has not turned out well for anybody,” says Grillos.

MeVC took the lofty idea of making venture capital public and dragged it through the gutter.

It seemed like a brilliant idea at the time. The year was 1999, and Wall Street worshipped all things venture. Newly public tech stocks shot up instantly in aftermarket trades. Individual investors clamored for access to the deals spun out of Silicon Valley’s Sand Hill Road venture capital country club. So an accountant, an investment banker and a research analyst decided that what the world needed was a publicly traded venture capital fund. They dubbed their creation MeVC.com.

But instead of a refreshing democratic inroad into the private world of venture, MeVC has become a very embarrassing public display of bad judgment and back-scratching. Investors have brought two lawsuits against MeVC’s former chairman, John M. Grillos, and his partners. The Securities & Exchange Commission is looking into a $3 million loan to a shell company and the questionable assumption of a $300,000-a-year lease liability.

No surprise, given the Nasdaq collapse, that only one of the fund’s 30 investments has risen in value. Half of the $330 million raised by the initial offering in March 2000 has vanished. What’s left is $111 million in cash and short-term debt and $45 million in 20 flea-bitten startups. At $8.40, the shares trade 60% below the offering price and 13% below the putative net asset value.

A group of angry hedge funds seized control in March and fired Grillos. Eager to get some juice from this lemon, the board will put to a shareholder vote both a tender offer for 25% of the outstanding shares at what would now be $9.15 a share and the hiring of Michael Tokarz, a former Kohlberg Kravis Roberts financier, to run MeVC. He would then invest the cash in older, private nontech firms.

Grillos defends his decisions, saying he was in the wrong place at the wrong time. “The environment got extremely ugly, and I couldn’t implement our strategy,” he says. “It wasn’t like a bunch of crooks were trying to skin the public.”

But the public got skinned anyway. None of MeVC’s early leadership–banker Andrew Singer, research analyst Peter Freudenthal and accountant Paul Wozniak–had ever led a venture deal. That didn’t stop Timothy Draper, a well-reputed VC running Draper Fisher Jurvetson in Silicon Valley, from buying in. The concept was that a privately held parent firm, MeVC.com, would run a series of investment funds that would be offered to the public. Draper invested $4.5 million of his firm’s money in the parent and joined as chairman of the first–and what turned out to be the only–fund, MeVC Draper Fisher Jurvetson Fund I. Draper stepped down when he and his partners picked Grillos to run the fund. Grillos, then 56, had an electrical engineering background, with an M.B.A. from the University of Chicago. He had been chief operating officer of SmartForce, an educational software company, and had had venture experience at Robertson Stephens. Prior to coming to MeVC he ran a $5 million angel fund.

MeVC took a fatal blow before it even got in the ring. Its mass appeal was based on its ability to invest in the best companies seeded earlier by the hot hands at Draper Fisher Jurvetson, but that depended on getting an unprecedented exemption from an SEC rule prohibiting affiliated parties from influencing one another’s investments. Fund I went public while waiting for SEC approval, and thousands of individuals bought in at $20 a share three weeks before the crash in April 2000. Four months later the SEC denied MeVC’s request to invest in follow-on rounds of DFJ deals, while permitting MeVC and DFJ to invest at the same time and on the same terms. But after tech swooned, few VCs were in the mood to share anything.

Left to his own devices, Grillos made some lousy calls. Of the 30 companies he backed in his three-year tenure, 10 were shuttered; all but one were written down. By December 2000 MeVC was trading at 91 cents on the dollar. Arbitrage funds moved in. Robert Knapp, managing director of Millenco, a New York-managed hedge fund, began building a 7% position.

In mid-2001 Grillos complained to the MeVC.com board that he needed more staff to dig up deals, as well as a bigger cut of the fund’s take. The way MeVC was set up, two groups had claim to the fund’s 2.5% management fee: MeVC Advisers, which provided back- office services and paid the bills, and Draper Advisers, which did the investing. Grillos led Draper Advisers, which pulled in 40% of the fee. MeVC Advisers, led by two of the founders, got the other 60%. Grillos thought he deserved 50%, but MeVC Advisers refused to give in. “We had a bloody brawl,” says Grillos.

He invested in 2 new companies in 2001, down from 16 in 2000, yet paid himself a $150,000 bonus and a $600,000 salary. When Draper found out, he sent Grillos a flaming e-mail, telling him he was “biting the hand that feeds” him and insisting he return the money. “I was never about to pay any money back,” says Grillos. “The only ones who could say anything were my directors, and they didn’t ask for it.” Draper won’t comment.

In March 2002 Grillos tried to increase his share of the fee by submitting a proxy that he hoped would slip by as “routine,” meaning brokerage firms vote on shareholders’ behalf, usually in favor of management. But days before the vote Millenco’s Knapp alerted the New York Stock Exchange and overnighted a letter to other investors saying Grillos was taking away their rights. Hours before the meeting the NYSE said the proxy was nonroutine, requiring shareholders to cast their own votes. Grillos lost.

In May Grillos’ lawyers sent the board of the publicly traded fund a proposal that would allow him to internally manage the fund, rendering MeVC Advisers powerless. The board didn’t go for it. A month later MeVC Advisers received a $400,000 legal bill. They didn’t have the money. Fearing that paying that and other debts would force them to withdraw more than the maximum fee of 2.5%, the founders resigned. The rest of the MeVC Advisers resigned the next day, triggering the resignation of Draper Advisers. The board, packed with Grillos loyalists, put him in charge.

In August, sick of what it called “the board’s contempt for shareholders,” Millenco filed suit in Delaware chancery court to void the election of two Grillos cronies on the board. The two directors were top executives at Evineyard, an online wine merchant that Grillos had backed in two of his prior funds–a fact he never disclosed to shareholders. (Grillos had earlier tried to invest in Evineyard with MeVC funds–also something he never told shareholders.)

Despite the growing scrutiny, in October Grillos hired another buddy as president, William (Boots) Del Biaggio, a 36-year-old venture debt financier he’d met on an earlier deal. Del Biaggio would lead the fund’s new loanmaking strategy. Del Biaggio’s last fund, Sand Hill Capital II, was burdened by its own debt and returned -50% over three years.

Their first decision as a team was to move into new digs on Sand Hill Road. As it happened, MeVC took over a space at the same address as Del Biaggio’s old fund. The new rental payment, $300,000 a year for the next three years, was ten times the going rate in nearby towns, but close to the amount Del Biaggio was reportedly paying for his fund’s overhead costs. Del Biaggio insists there was nothing unethical: “Being on Sand Hill was like a marketing expense.”

Grillos’ problems mounted. In November SmartForce, where he served as chief operating officer, restated three and a half years of filings, starting in 1999. A class action followed. Grillos says he left the firm before the books were cooked but he was a director until September 2002.

In mid-December the Delaware court ruled in Millenco’s favor to ax Grillos’ two board appointees. Millenco’s next step was to build its own slate of directors and put both to a shareholder vote at the annual meeting in February. Grillos kept on investing: He arranged $20 million in debt deals in December, including $3 million to a shell company, BS Management, located on the Isle of Man, that was supposed to invest the funds in another firm.

The final proxy battle began in January as Grillos and Knapp each proposed a slate of directors. Grillos sued the opposing shareholders for conspiring to raid the fund. A judge dismissed that suit four days before investors voted out Grillos’ board 4-to-1. “Charles Manson and O.J. Simpson could have run against Grillos and I would have voted for them, if they closed the discount,” says shareholder Phillip Goldstein of Opportunity Partners.

On Mar. 3, days after an early vote count showed he’d lost the election, Grillos modified terms of the $3 million Isle of Man loan, delaying the repayment date and, Knapp says, making it possibly uncollectable. Grillos says this will be the best investment he has made at MeVC.

Knapp is suing to reclaim the $3 million. Meanwhile, MeVC shareholders are on the hook for $4 million in legal fees run up by both past and present management. Grillos is mulling his future. “I did what I said I was going to do. People could say I was a moron, but I didn’t want them to think I wasn’t a standup guy. This has not turned out well for anybody,” says Grillos.