When Mark Seeger discovered that he and Vincent Ip shared a passion for motorcycles, he invited Ip to help him launch Mission Motorcycles, a now fast-growing San Francisco-based company that sells high-performance electric motorcycles dubbed “Teslas on two wheels.”
Less than six months after the company’s founding in May 2013, however, relations between Ip and Seeger went south. Seeger terminated Ip’s position as chief strategy officer in late November 2013 and planned to buy out his company shares. A third co-founder, Andrew Ng, stayed on as chief financial officer.
Ip didn’t accept the buyout offer, and the situation quickly devolved into a nasty legal battle. Mission sued Ip in December, saying he signed a restricted stock agreement that allowed them to buy out his shares of the company when he was terminated. Ip then countersued in February, accusing his former partners of fraud and demanding $9 million in damages.
Mission Motorcycles’ predicament isn’t that rare. Most of today’s most successful and promising startups aren’t founded by one person alone; they're built on the ideas and efforts of many individuals. But when a company finally hits the big leagues, not everyone involved in the company’s creation necessarily reaps a payoff. In fact, some co-founders and others involved in the startup phase may feel spurned because they get little or no reward for their contribution while others get payoffs of thousands, millions—or even billions—of dollars.
Tyler and Cameron Winklevoss are probably the most famous example of such alleged spurning. The identical twins, along with their former business partner Divya Narenda, claim that Facebook CEO Mark Zuckerberg took their idea and source code for a student social-networking site they created called ConnectU while all were attending Harvard in 2004. The Winklevosses originally accepted a $65 million settlement offer in 2008, which included cash and Facebook stock in exchange for dropping their litigation, but later resurrected their lawsuit, saying the settlement offer was based on an inaccurate valuation of the company. Eventually the Winklevosses accepted the original offer.
While few cases are as prominent as the Winklevoss case, lawsuits filed by people claiming they had their business ideas stolen or that they deserve an equity stake in a successful company aren’t uncommon, says Dennis J. Ceru, an adjunct entrepreneurship professor at Babson College in Wellesley, Massachusetts. Particularly after a company becomes highly successful and profitable, anyone who was closely involved with the company’s founding may feel they deserve to share in the success.
“'Pray that you become wildly successful, and set aside some money for a lawsuit and a settlement, because it’s going to happen,'" Ceru tells his students and other aspiring entrepreneurs. "[Someone] will feel, rightly or wrongly, that they are owed some money.”
The Snapchat Situation
There are many high-profile examples of founder fallouts and legal battles. Snapchat, the popular app known for disappearing messages, is one of the latest such situations.
The company was recently sued by co-developer Frank Reginald “Reggie” Brown IV, who was a friend of Snapchat founders Bobby Murphy and Evan Siegel when they all attended Stanford together. Brown claims that he originally came up with the idea for Snapchat in 2011 but was forced out of the company soon after its founding.
Brown filed a lawsuit in Los Angeles Superior Court against Spiegel and Murphy in February 2013, claiming they kicked him out of the business in July 2011, just one month after the company was launched. Brown later extended his legal pursuits, also suing Snapchat investors such as Lightspeed Venture Partners and Benchmark Capital and claiming that he is rightful owner of one-third of Snapchat, which is reportedly now worth more than $2 billion. The ousted developer claims that he rightfully owns part of the millions of dollars in outside funding that Snapchat has received so far.
Brown submitted numerous photos, texts and emails as proof that he was working closely on developing Snapchat, originally called Picaboo, with Spiegel and Murphy in summer 2011. Spiegel confirmed in court testimony that Brown was the originator of the concept, but he and Murphy still contend that he doesn’t deserve to own one-third of the company.
Two Sides to Every Story
Such co-founder breakups and disputes over company equity happen for a variety of reasons. Sometimes founders discover late in the game that they have different visions and one simply needs to leave for the company to succeed. Sometimes one founder turns problematic, or isn’t seen as contributing enough, and is forced out of the company. Sometimes a founder simply decides to leave voluntarily and pursue something else, but still feels he or she is owed something if the company becomes a hit.
Co-founder disputes often prove difficult to resolve, Babson College professor Ceru says, because emotions and differing opinions are often involved. Many times one person thinks he or she contributed far more than the other, while the other thinks just the opposite. And, of course, there are always two sides to every story.
It’s unclear exactly what led to the breakdown in relations between Seeger and Ip in Mission Motorcycles’ case, which was filed in U.S. District Court of New Jersey. An amended complaint filed by Mission Motorcycles in February claims that Ip lied about receiving his bachelor’s degree in computer science and English from Rutgers University-Newark in 2003 and that he had threatened violence against Seeger and acted unprofessionally around potential investors.
According to Mission’s original complaint:
"Among other things, Defendant Ip threatened Mr. Seeger with violence in the workplace; he made disparaging and inappropriate personal and professional remarks about other executives and employees; he was unable or unwilling to act professional to interact professionally in business and professional situations, damaging the Company’s reputation and standing with potential investors and other business partners; he failed to contribute to, understand or appreciate the company’s technology and its products such that he was unable to contribute to the business and its strategic goals he failed to assist with and/or fulfill the financing commitments he had made to the Company; and he engaged in other acts of unprofessional behavior."
Because Mission claims Ip lied about his degree in a “fraudulent scheme” to work for Mission, the amended complaint says that Ip should be forced to forfeit his shares in the company or receive no more than $25,000—the amount that would have vested under the stock agreement that Ip had signed last summer.
When reached by phone, Seeger declined to comment on the lawsuit or explain the events that led up it because it’s an ongoing case. However, he said, Mission Motorcycles has continued to be a successful operation in the months since Ip’s departure. “Mission Motorcycles is doing very, very well,” he says. “We have more orders for vehicles than we can afford to produce and we’re expanding into other categories, [such as] boats.”
Ip’s attorney, Lisa Solbakken of Arkin Solbakken LLP in New York, says Ip felt “abject betrayal” when he was terminated by Seeger in November and received the separation agreement. His response to the complaint, filed on March 18, claims that Seeger had concocted an ongoing “plot” to fully control Mission Motorcycles’ and “freeze out” Ip.
According to Ip’s response:
"Seeger’s fraudulent scheme culminated in his unilateral ‘termination’ of Ip—a co-founder of Mission who had worked tirelessly to build the company without receiving any compensation, but with the expectation that he would share in the Company’s future success—and the ‘repurchase’ of nearly Ip’s entire equity stake in the company for pennies on the dollar pursuant to an agreement (the 'Stock Restriction Agreement,' or 'SRA') that was both induced by fraud and lacked any consideration whatsoever."
The response also indicates that Ip had purchased his 300,000 shares of Mission Motorcycles’ for $30,000 and that Seeger wanted to pay him just $27.50 for those shares when he was terminated. Solbakken said that Ip is not interested in selling his shares unless he receives what he considers fair compensation for them.
Preventing Founder Disputes
While it’s difficult to prevent lawsuits when a company becomes successful, startup founders can take some steps to try and minimize the damage and make it easier for one founder to leave if need be, Ceru says.
“We’re in a litigious society and people sue and some courts are more generous than others," he says.
Ceru recommends that startups put in place employee contracts, buy-sell agreement, stock options agreements and vesting schedules that make it clear cut what would happen if one founder leaves voluntarily or is forced out.
Of course, as the Mission Motorcycle case shows, even having contracts and agreements in place is no guarantee that startup founder lawsuits and disputes won’t happen. But startup founders need to be prepared for such risks, he says.
“There’s always potential exposure," Ceru says. "You can’t live your life afraid.”
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Photos: Getty Images, Courtesy Mission Motorcycles and Courtesy Vincent Ip FB