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                                                                    Exhibit 10.5


July 30, 2001

VIA HAND DELIVERY


Michael Bailey
PeoplePC, Inc.

Re:  Severance Benefits

Dear Michael:

In consideration of your continued employment, PeoplePC, Inc. ("PeoplePC" or the
"Company") is pleased to offer you the following agreement regarding severance
benefits (the "Agreement").

     1.   Entitlement To Severance Benefits. Subject to the terms and conditions
of this Agreement, and without regard to the occurrence (or non-occurrence) of a
change in control or other reorganization of the Company, the Company will
provide you with Severance Benefits (defined below) if the Company terminates
your employment at any time during the Term without Cause (defined below). You
will not be entitled to receive any Severance Benefits if the Company terminates
your employment for Cause or if you resign from your employment. As used herein,
the "Company" includes any successor in interest to PeoplePC.

     2.   Description of Severance Benefits. For purposes of this Agreement,
"Severance Benefits" are defined as severance pay equivalent to four (4) months
of your Base Salary (defined below) in effect as of your last day of employment
with PeoplePC (the "Termination Date"). The severance pay will be paid in a
single lump sum within seven (7) days after the effective date of the release
described below, and will be subject to standard payroll deductions and
withholdings.

To receive the Severance Benefits, you must first sign a general release of
claims in favor of the Company in the form attached hereto as Exhibit B.

     3.   Definition of Cause for Termination. For purposes of this Agreement,
"Cause" shall mean the Company's termination of your employment for any of the
following reasons: (a) your indictment or conviction (including a no contest or
guilty plea) of any felony or crime involving dishonesty or moral turpitude; (b)
your participation in a fraud or act of dishonesty against the Company; (c) the
material breach of your duties to the Company, including insubordination,
misconduct, excessive absenteeism, or persistent unsatisfactory performance of
job duties; (d) your intentional damage to, or willful misappropriation of, any
property of the Company; (e) your material breach of any written agreement with
the Company; or (f) conduct that in the good faith and reasonable determination
of the Company's Board of Directors demonstrates your unfitness to serve.

                                      1.
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     4.   Definition of Base Salary. For purposes of this Agreement, "Base
Salary" means your base salary as of the Termination Date, excluding: the
Bonuses or any other type of bonus payments, commissions, incentive payments or
any other remuneration paid directly to you, or any other income received in
connection with stock options, contributions made by the Company under any
employee benefit plan, or similar items of compensation.

     5.   Term. The term of this Agreement (the "Term") shall commence as of
August 1, 2001 and terminate on April 30, 2002.

     6.   At-Will Employment. Nothing in this Agreement alters the at-will
nature of your employment relationship with the Company. Subject to the terms of
this Agreement, either you or the Company may terminate your employment
relationship at any time, with or without Cause or advance notice.

     7.   Dispute Resolution Process. All disputes, claims and causes of action,
in law or equity, arising from or relating to this Agreement or its enforcement,
performance, breach or interpretation shall be resolved solely and exclusively
by final and binding arbitration before Judicial Arbitration & Mediation
Services, Inc. ("JAMS") in San Francisco, California, using a single arbitrator,
under the then-existing JAMS employment arbitration rules. However, nothing in
this section is intended to prevent either you or the Company from obtaining
injunctive relief in court to prevent irreparable harm pending the conclusion of
any such arbitration.

     8.   Miscellaneous. This Agreement constitutes the complete, final and
exclusive embodiment of the entire agreement between you and the Company with
regard to Severance Benefits. It is entered into without reliance on any promise
or representation, written or oral, other than those expressly contained herein,
and it supersedes any other such promises, warranties or representations.
Because of this individual Agreement, you will not be eligible to receive
severance benefits under the PeoplePC Severance Benefit Plan or any other
Company-wide severance plan or practice. This Agreement may not be modified or
amended except in writing signed by you and a duly authorized officer of the
Company. This Agreement will be deemed to have been entered into and will be
construed and enforced in accordance with the laws of the State of California as
applied to contracts made and to be performed entirely within California.

                                      2.
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The Company appreciates your continuing contributions to PeoplePC.  Please sign
below to indicate your understanding and acceptance of this Agreement and return
the signed original to me at your earliest convenience.

Very truly yours,

PeoplePC, Inc.

By: /s/: Nick Grouf
    ---------------

Title: Chairman & CEO
       --------------

Understood and Agreed:

/s/: Michael Bailey                   August 6, 2001
-------------------                   ----------------------------
Michael Bailey                        Date

                                      3.
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                   [EXHIBITS A & B ON FILE WITH THE COMPANY]