VCs Pay Off Epinions Shareholders, Open Door For New Lawsuits

from the start-of-a-trend dept

This story may not get too much attention, as it seems like a fairly quiet settlement to a lawsuit that wasn't that interesting in the first place, but hearing that the investors in Epinions have agreed to pay out some money to fifty-one former employees could shake up some of the folks in their comfy offices up on Sand Hill Road. The story, which we've followed, involves a startup that was created at the height of the hype during bubble 1.0 and was supposed to be a Silicon Valley fantasy story about the perfect startup -- that turned into something less than ideal. The company had big names, big ideas and big backers -- but the product was only marginally successful, and after lots of struggles most of the original big name employees had bailed out. At one point, in order to secure a round of funding, the existing investors convinced old employees to give up their shares. This happens. However, depending on who you talk to, when the company did this, they kept secret the knowledge that they were about to sign a deal with Google that would eventually boost their revenue and let them get bought out by Dealtime to become Shopping.com -- itself eventually acquired by eBay. The shareholders who sold out turned around and sued their investors, claiming that they were tricked into giving up their shares. Of course, what was most amusing was that for all the stories about how "experienced" the founders of this startup were, none were apparently so experienced to understand that such deals are a part of Valley life. If they didn't give up their shares, then the financing might not have occurred, and the deal with Google (at the time) certainly wasn't obviously as big a deal then as it was now in retrospect. They agreed to give up their shares -- which, in part, helped the company get to the stage where it could be acquired. By suing, and now getting money out of it, they're opening up the doors to more lawsuits of this nature, where investors who sell out get to come back later for their "share" if a company turns itself around. Update: As is pointed out in the comments, it wasn't a "round of funding" that caused the shareholders to give up the funds, but the merger with Dealtime. However, the rest of the point still stands. The merger might never have happened without these people giving up their shares.


Reader Comments (rss)

(Flattened / Threaded)

  1.  
    identicon
    Haggie, Dec 8th, 2005 @ 3:05pm

    No Subject Given

    As shareholders, they should have been informed of the potential deal, how keeping or relinguishing their options would impact that deal, and then be allowed to make an informed decision.

    The VC(s) witheld material information in a manner that borders on fraud. The employee optionholders were clearly mislead and material information was witheld. What is legitimate about that? If anyone else has been in that situation too, I think they are warranted in pusuing the same remedy. This isn't trying to jump on the gravy train afterwards...

     

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  2.  
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    Chris Maresca, Dec 8th, 2005 @ 4:41pm

    I hope that they got enough money...

    ... because, whatever the case may be, they've basically burned all their bridges re: future VC funding.

    I agree, they should have known about impending deals and VC's are usually pretty cagy about things, that's their style. But still, the startup game in the valley is all about snowing people for a better valuation, and many people just don't seem to get that with the sums involved, a lot of basic principles often go out the window....

    BTW, here's a great article about how engineers and founders get screwed over. It used to be on IEEE Spectrum, but they've since deleted it, so it's been archived by someone here.

    It may not be right, moral or nice, but that's pretty much the way things work in the startup world, whatever the popular image might be. The fact that this was settled says more about how expensive lawyers are than anything else.

     

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  3.  
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    Michal Palczewski, Dec 8th, 2005 @ 5:12pm

    in the end everybody wins

    sounds like there were some internal trading laws broken, and justice was done.

     

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  4.  
    identicon
    Howard, Dec 9th, 2005 @ 6:10am

    Wrong. In the end the lawyers win

     

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  5.  
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    kibitzer, Dec 9th, 2005 @ 11:52am

    get the facts straight...

    There was no financing that employees gave up their shares to permit... The merger with Dealtime cancelled the common stock.

     

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  6.  
    identicon
    Anonymous Coward, Dec 9th, 2005 @ 12:11pm

    Hiding this sort of information is not just wrong,

    > The merger might never have happened without < BR>> these people giving up their shares.
    Which is an option that should have been presented to them, but hiding the information of the pending deal was just sleazy. If it was not relevant then why not disclose it and if it was relevant some people on sand hill road should have had the SEC knocking on the door... It does not surprise me that benchmark was getting sued here, but from my dealing with august capital I was rather surprised to find out that they went along with the play benchmark tried to make.

     

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  7.  
    identicon
    Jimbo, Dec 9th, 2005 @ 4:44pm

    Be Fair

    Your vehemence against the commpon shareholders is surprising. Read the complaint. The deal would have been done anyway, it's just a question of how the proceeds were divvied up. There was no sale - it was a cancellation. Most of the common shareholders didn't approve the deal. There was lots of stuff with-held, not just the Google thing. And the CEO who had engineered the transaction was later fired for resume fraud (Nirav Tolia). And the company didn't "turn itself around." It was profitable at the merger, the growth stats available on the S-1 show that growth was stable, not increasing.

     

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  8.  
    identicon
    Common Man, Dec 10th, 2005 @ 2:42pm

    tech dirt has the facts wrong...

    The author claims to have kept up with the suit, but he is completely off on his facts. According to the original complaint and New York Times story (a quality source of news), the shares being taken had nothing to do with a financing. Furthermore, Epinions was not in trouble but rather was profitable, had just signed a huge deal with Google for $12 million dollars, and had nearly $10 million in cash in the bank.
    This is good not only for the employees of Epinions, but for all future startup employees and for the system in general.

     

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  9.  
    identicon
    Skeptic, Dec 10th, 2005 @ 11:35pm

    No Subject Given

    "However, the rest of the point still stands. The merger might never have happened without these people giving up their shares."
    So you correct the factual misstatement, but then stand by the point that misstatement led you to? Great journalism.
    For a company [Epinions] with around $8 million in cash and which was already profitable BEFORE a $12 million dollar deal with Google, would not doing a merger have been such a bad thing for the shareholders? Can you explain that to your readers?
    Read the comments related to this story on your blog, the stories by the New York Times, the Wall Street Journal, Dow Jones, and the AP – it is clear that you are biased for some reason. Do you have a relationship with the VCs? With Nirav Tolia? Why are you so biased that you are willing to create facts and then defend your point even after you acknowledge that your facts are wrong? Can you state for all of your readers that you do not know and have no affiliation to any of the defendants in this case? Based on your postings, I would be willing to bet that you do…

     

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  10.  
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    Mike (profile), Dec 11th, 2005 @ 1:34am

    Re: No Subject Given

    Can you state for all of your readers that you do not know and have no affiliation to any of the defendants in this case?

    Wow. Talk about an accusation. I can state for the record that I have no affiliation with anyone on either side of the case. The only person I've met (and only once), actually, is one of the shareholders who is suing. I've never met Nirav Tolia, though he did email me once many years ago thinking I was someone else. However, if you've read any of my past stories about Epinions, I've been quite negative on them from the beginning. My guess is that Tolia, if he even knows who I am, doesn't particularly like me.

    My position has nothing to do with a "bias" about one side or the other. I just don't find the shareholders' case particularly convincing, and I find the story amusing, because the whole deal with Epinions was that these guys were all supposed to be so "experienced" that they knew how the startup game was played -- which, in retrospect, is being shown to be as ludicrous as the stories about them in the beginning.

     

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  11.  
    identicon
    Skeptic, Dec 11th, 2005 @ 7:10pm

    Thank you

    Reasonable people can agree to disagree. Thank you for the clarification on potential conflicts of interest.

     

    reply to this | link to this | view in thread ]


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