The Price of Friendship – Part 1
This week, the vast majority of the performance marketing industry swarmed to San Francisco for one of three shows, the largest being the ritual we call ad:tech. There are two distinct sides to every show – the public face, that which we put on in meetings or working the booth and the private face which comes out during the parties. At any company, there is always the balance between the public and the private. When going to a show, we just end up seeing (and revealing) more of the private side than is typically the case. The private side doesn’t just encompass the let loose attitude; it also includes the behind the scenes affairs that shape the company. The smaller the company and the longer you have worked there, the more you see. Even then, though, unless you founded the company, there exists another layer of activity and information, a layer about which gets whispered, discussed, and at times endlessly speculated, yet rarely revealed. And, it usually involves one of two things, relationships and money.
Infrequently, the veil of secrecy gets reveled, sometimes through an inadvertent admission, but other times tangentially, through the legal system. You will find no shortage of complaints, and some of the most frequent seem to involve trademark issues. The performance marketing space had its issues with trademark complaints during the flog era, but many of those suits didn’t say much outside of letting people know a company was being sued. On occasion, though, you will find one that addresses one of the whispered about, but rarely confirmed, areas of relationship and money. Such happened when I came across Delaware Courtlink case CA5016.
Like any complaint, the first part outlines the basics of the case, and in typical legalese, the language doesn’t make it accessible to the average person. Luckily, this one starts straightforward enough. "Plantiff brings this Complaint to enjoin [Defendant’s] sale of his outstanding shares of common stock in [Company] to [Private Equity Firm]" After a trip to m-w.com to look up that enjoin means prohibit by legal action, what we have is a case of one Co-founder looking to stop another Co-founder from selling equity to an outside investor. One co-founder suing another probably happens more than I would imagine, as we read about with a CPA network in LA, but in this case, it would be the equivalent of discovering that two long time friends and founders of any successful company no longer spoke to each other, when everyone else assumes them to be the best of friends.
This company formed the about the same time as one of the best known, in 2000, and similar to that company, they saw rapid growth. This one went from sub-seven figure revenue in 2000 to nine-figure revenues six years later. Do that in high interest industries, such as internet advertising, and you will start to attract the attention of outside investors. And, like its comparable in the cpa network space, this company fielded no shortage of inquires from the the venture community, especially those interested in later stage investments. The better known now, but not all common knowledge to the average employee is that what happens with many later stage investments, namely that the founders get to benefit directly. Some of it gets used for operations, but part of the appeal for the founders comes from being able to cash-in. And, this happened here, when the two founders agreed to an investment of $150mm into the company; it was $150mm for a large but not controlling interest. The deal closed February 12, 2008, and while, neither founder knew it at the time, the closing of the deal was the beginning of the end of their relationship as they knew it.
In many self-funded success stories, making money comes before process. That means much of the corporate administration gets relegated to the backburner. You don't think about equity incentive programs for example, and, it also tends to mean avoiding some very difficult founder to founder discussions. You don't want to doubt your founder, to argue with them. You picked them initially because you feel like you can trust them. You have their back and they yours. It's like dating. You've found someone you like and are excited to make it work, so you leave a lot of questions unasked, because like a relationship, you don't want to kill the romance. But, starting a company isn't like dating, it's marriage, so you have to talk through the hard decisions early on. Doing so isn't easy, because it means some tense moments and a greater likelihood that you won't work together than if you just jumped into it, which is what so many do.
In dating, you get to take your time understanding the person and making sure your mutual needs get met. After a period of time, you might choose to take the relationship to the next level and get married. Co-founding a company is no different, except that you shouldn’t do it until you have truly dated the other co-founder. How can you make sure you meet each others needs if you don’t really know them? That is what happened with these two founders. Their relationship, like many actual marriages, ended in divorce, taking a lengthy six years to unravel. The company was their kid and this lawsuit is almost like a custody battle and it wasn’t just money that caused the two to part ways; it was a story of trust and perceived betrayal, like being cheated on which caused a quick and deep split. The details, though, would have not been known, if a suit was not filed.
What happened exactly and why it matters, can be found in the continuation of the story here.
