Back in 2006, the Internet telephony company Vonage ruled more than half the North American Voice over Internet Protocol (VoIP) market [source: Kharif]. But marketing and managing all of those online phone lines turned out to be quite expensive and Vonage was losing money every quarter -- lots of money. From its founding in 2001 until February 2006, the company had lost $310 million [source: Kharif].
Meanwhile, major telecommunications and cable companies were gearing up to offer VoIP products of their own, representing the first real threat to Vonage's dominance. To raise some much-needed cash, Vonage execs decided to go public on May 24, 2006, offering shares at $17 a pop. On the surface, it looked like a success, raising $531 million in quick capital [source: Reardon].
But this wasn't your normal IPO. Usually, IPO shares are shopped around to investment firms and individual big-ticket investors who do business with the underwriter. Vonage took the unusual tactic of offering 13.5 percent of its IPO shares directly to Vonage customers, who could buy the shares online through a special Web site created by the underwriting firms [source: Reardon].
In an ironic twist, the high-tech company was undone by a technical snafu. When excited Vonage customers tried to buy stock online, many were told that the purchases didn't go through. Then, a few days later, after the stock price had dropped considerably -- it lost 30 percent in the first week alone -- the customers were told that their purchases had gone through and that they owed the original stock price of $17 a share. Oops.
The angry customers won a class action suit against the underwriters, which came to roughly $800,000 in fines and restitution [source: Shwiff]. The botched IPO inspired a second lawsuit against Vonage for misleading investors [source: Reardon]. All in all, this wasn't the smoothest coming out party for Vonage.