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Small biz caught in 'David and Goliath' crossfire

The real reason payroll processing giant ADP blocked human resources start-up Zenefits from accessing its systems is fear of being bested by a more innovative enterprise, said Parker Conrad, co-founder and CEO of the fast-growing Silicon Valley firm. ( Tweet This )

Zenefits—valued in just two years at $4.5 billion—offers services and software to help small and medium-sized businesses manage administrative HR tasks through a single dashboard. Zenefits competes with ADP on insurance and other services. But for payroll, the platform is designed to connect to ADP and other third-party systems.

"We interface with the ADP the same way every other accountant or bookkeeper ... does. ADP has a system for doing this," Conrad told CNBC's "Squawk Box" Thursday in an interview, following last week's decision by ADP. "To this day, any ADP client can add anyone they want as a third-party administrator to their payroll system as long as it's not Zenefits."

New Jersey-based ADP, a 66-year-old company with a market value of nearly $40 billion, said in a statement the start-up was pulling sensitive data including "unmasked Social Security numbers and employee banking information, in a manner that did not comply with ADP's standards for data security."

"There's nothing wrong with our security," countered Conrad. "All of our information is encrypted. It rests in our database. Everything whenever it's being transmitted is transmitted over a secure connection."

Zenefits said in a blog post the move is really about stifling competition, which prompted ADP to file Wednesday a federal defamation lawsuit in California.

"What old-line businesses do, a standard part of their playbook when dealing with an innovative new market entrant, is to sow fear, uncertainty and doubt," referred to in Silicon Valley by the acronym FUD, said Conrad.

Zenefits is backed by venture capital powerhouse Andreessen Horowitz and other investors including actors Jared Leto and Ashton Kutcher. The Hollywood stars defended Zenefits on Twitter.

Leto tweeted:

Kutcher tweeted:

"So really what happened is ADP is scared because Zenefits has this service that makes all the stuff around HR and compliance and benefits and payroll really effortless for companies," Conrad said.

"We want this to work for our customers because the saddest thing about this whole thing is ADP, in their efforts to go to war with Zenefits ... [is] attacking their own customers who rely on Zenefits," he added.

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