VCs, Epinions workers settle legal dispute

Check out this story from the Dow Jones newswire:

PALO ALTO, Calif. (Dow Jones)
–Fifty-one former employees of the startup Epinions Inc. settled their legal dispute with three prominent
venture-capital firms and eBay Inc. (EBAY) in a case that could serve as an
admonition to the venture community.

prefers this version over

the one published by AP
because they mention the name of
his new company.

PALO ALTO, Calif. (Dow Jones)
–Fifty-one former employees of the startup Epinions Inc. settled their legal dispute with three prominent
venture-capital firms and eBay Inc. (EBAY) in a case that could serve as an
admonition to the venture community.

The settlement evolved in the months after the two sides entered mediation
in September and was formally agreed to last week.
It calls for a payment to be made to the 51 founders and employees of
Epinions, which in April 2003 merged with DealTime Ltd to become Ltd. and in August 2005 became part of eBay. The amount of the
payment was not disclosed.

“Our clients are very pleased with the resolution of the case,” said Stephen
Morrissey, an attorney representing the employees. “We were optimistic with
how the case would turn out going forward.”

The employees filed suit in January 2005 claiming the venture firms and a
former Epinions official misled them about the financial health of the
company. The employees say they were convinced to give up their stock prior
to the DealTime merger and before a lucrative initial public offering. Three
venture capitalists listed in the suit – J. William Gurley of Benchmark
Capital, John Johnston of August Capital and Thomas Geiselmann of BV Capital
Management LLC – had invested in Epinions and were board members.
Benchmark and August declined to comment on the settlement. Geiselmann did
not return a call seeking comment, and eBay released a brief statement
agreed to by the parties in the case.

“Defendants and plaintiffs are pleased that their disputes have been fully
and finally resolved, and eBay acknowledges the role of Epinion’s employees
and founders in making the company a success,” read part of the statement.
In an October quarterly filing with the Securities and Exchange Commission,
eBay said it planned to account for its portion of the payment as an
“assumed liability” related to its purchase of

The settlement is likely to have a lasting influence on the venture
community. In past decades, venture capitalists have considered themselves
free from founder suits. After all, which entrepreneur would sue a firm that
might fund his or her next company?

“It’s not true anymore,” says Bernard Vogel III, a corporate attorney at the
Silicon Valley Law Group. “I think there is going to be more litigation
against VCs.” The contentious private company re-financings in the years
after the dot-com collapse could be a source of the disputes, Vogel says.
The parties in the case filed a request in federal district court on Tuesday
to transfer the matter back to California state court, where it is expected
to be dismissed.

“It was a hard fought litigation from day one,” said Morrissey. At the root
of the dispute was the employees’ claim that while the VCs painted a bleak
picture of the company’s fate, undisclosed results and projections showed
growth and profits. The VCs also didn’t mention a deal with Google Inc.
(GOOG), which a company executive described in an e-mail as “one of the
biggest wins in our history,” the suit claims.
Some of the former employees said they were seeking between $20 million and
$45 million in damages.

The suit is not the only milestone case re-shaping the way venture partners
deal with entrepreneurs. Early this year, Aamer Latif, founder of Nishan
Systems, settled out of court after filing suit in 2003 against ComVentures
and Lightspeed Venture Partners, along with McData Corp. (MCDT), Credit
Suisse First Boston and members of the Nishan board. Latif had accused the
defendants of fraudulently buying votes of approval of Nishan’s $85 million
merger with McData. The settlement was not disclosed.
In a higher profile case filed 11 years ago, founders of Alantec Inc. won a
$15 million settlement from venture capitalists after Fore Systems Inc.
bought the company for $770 million. The VCs had diluted the founders’
ownership in the company to .007% from 8%.

Venture capitalists will have to “start realizing they are going to have to
be a lot more careful” in a post-Enron era where board members have
heightened responsibilities, says Vogel.

Already any stigma associated with filing suit against a venture capitalist
appears to be lifting. Naval Ravikant, a founder of Epinions and a plaintiff
in the suit, is the chief executive of a new startup, Omni-Explorer
Technologies Inc. In April, he raised venture financing from a venture
capitalist, even as his suit played out in court.

Leave a Reply

Your email address will not be published. Required fields are marked *