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The Silly Startup and the (Law)suit It Spawned
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I’m going to try something different.
I’m going to relate the story of the greatest disaster that ever befell me. Or so it seemed while I was going through it. In retrospect it’s still pretty bad, but having fully recovered I can now also appreciate how weird it was. I’m hoping that you’ll appreciate that as well. Also one of my readers requested it and I’m a sucker for reader requests.
You’ll need to know a few things before we dive in. First, I have changed all the names, and some of the details. As you can tell from the title I was sued and I don’t want it to happen again. Second, I have simplified things just a little bit. True life is a lot more complicated than fiction, and I want you to be able to follow the story.
When my story begins I’m in a business with three other partners (four guys total). One of the partners has given up on the business, forcing us to consider — and as you’ll see eventually accept — an acquisition offer from a local startup that he arranged, and which was very beneficial to him. The story of that partner and indeed how I arrived at that spot, will have to wait for another time, he will not come up again. As far as the other two partners and the rest of the characters, I have decided to use characters from Brooklyn 99 as stand-ins (with two Parks and Recreation cameos). I’m hoping that this will help you to both visualize their attributes and keep track of them. With some of the characters I’ll just introduce them as part of the narrative, but there are some who are important enough that I’ll introduce them separately. To start with:
Jake Peralta: Peralata is one of my two partners. Young and an immensely talented programmer.
Charles Boyle: Boyle is the other partner. Also a very talented programmer, but kind of weird and very, very talkative.
The 99: The Startup that acquired my business and where all the weirdness happened.
The Vulture: This is the CEO of the startup. So if you’re familiar with Brooklyn 99 imagine Season 3 when the Vulture becomes the new captain. The real CEO was nicer, but equally misguided.
Norm Scully: Scully was yet another major shareholder. He functioned (poorly) as de-facto CFO and COO for most of the time.
Our story begins in 2011. As Peralta, Boyle, and I considered the acquisition offer, right out of the gate we made two critical mistakes. I’d rather not admit my big mistakes, but this post will be full of them and perhaps those that follow in my footsteps will glean some wisdom from them. The deal coupled a small amount of cash with what we thought was a large amount of stock. Of course, as we all learned from The Social Network, thousands of shares of stock are meaningless if there are millions of shares outstanding. Now at the time I did, repeatedly, ask to see the 99’s cap table. The Vulture kept promising to get it to me, but he never did, and I didn’t make that our line in the sand. But I should have.
Ultimately the 99 didn’t have a liquidity event or any kind of exit so it didn’t matter, but part of the reason we were doing the deal, despite our misgivings, was the idea that we might get rich from it. Much later I did see the cap table and it turned out that we each owned a mere 0.21% of the company. So given that my “I can retire amount” was at least $3 million, to have reached that goal the company would have to be worth a minimum of $1.5 billion, and that assumes no further dilution. This was never going to happen.
The second mistake involved the contract we signed. Among other draconian terms, it included a non-compete and ownership of everything we created while working for the 99. But once again, rather than drawing a line in the sand, I pushed past my doubts. I rationalized that it was mere boilerplate and thought, “Of course people have to sign this. It’s never going to actually come to that, aren’t we all friends?” sort of thing. Even so we did bring up our concerns and the Vulture solemnly promised, in writing, that there was no way he would ever sue us. The mere idea that it would ever come to that was ludicrous.
With our 0.21% and onerous employment contracts in hand we joined the 99 and began working. On the plus side the pay was really good, not crazy good but nothing to sneeze at either, and also…
Actually that was basically it.
The money was good. Everything else was awful. To spare your time and my fingers I will not go into every element of the farce we called a startup but here are some highlights:
The 99 was supposed to be a cross between Amazon and Facebook, sort of a social selling platform, but beyond this somewhat vague idea, the overall vision and the direction for the company was incredibly nebulous, to the point that it felt like we were writing code almost at random.
There were four major stockholders. We’ve already met the Vulture, then there was the Commissioner, Wuntch and Scully. The Commissioner was off doing another startup. Wuntch, on the other hand, had already been indicted for tax evasion when we joined and about a year into things she went to jail for five years.
Scully was an older religious gentleman (LDS) who tried to treat the startup like a normal business, when it was anything but. This tension caused him to have numerous health problems both physical and mental. When he would reach his breaking point, which happened frequently, he would send out blisteringly pessimistic emails, and threaten to resign. He may have been the only sane one there.
The Vulture was horrible at hiring people, really just awful. We weren’t big enough to justify having in-house counsel, but he hired someone anyway. The guy he hired was disbarred, rarely arrived at the office before noon, and mostly napped during the brief period when he was in the office. Beyond that he had been married seven times. Which I guess wouldn’t necessarily make him a bad employee, but still… Most incredible of all, as a lawyer he didn’t know how to use command/ctrl-f to search for something in a document. (I can put up with a lot, but that?!)
The Vulture also hired an administrative assistant, mostly because one of his buddies, who was going through a divorce, thought she was hot. (Nota bene: This was not the only person hired on the basis of their attractiveness). In another colossal case of tech ignorance it turned out that she didn’t know how to “reply all” when responding to an email.
I’m not even close to being out of bad hiring stories, but I’ll toss in one final example. The Vulture brought on a salesperson. This salesperson decided that we needed a document describing how we would move people from sales to fulfillment (I use both of those terms loosely, things were far too chaotic for either of those to really be a concrete role.) I offered to write it, but he was in a hurry so he said he’d take a crack at it. Here’s the first bullet point (and assume the entire thing has one giant [sic] attached):
Stage 1: Hand-off:
Each customer is different and its our job and duty with the services/solutions person the positive impacts of new application from Float/99… Keeping them engaged in, are re-affirmed. assure and highlight the process moving forward and staying consistent is our #1 success factor. THE MAIN GOAL IS ACCOMPLISHING OPEN LINES
That’s just a small sampling of the insanity. I have a dozen additional stories that are even more idiotic, they just require quite a bit more backstory to tell properly. Also the madness started off slowly, and it took a while for its full scope to manifest. But even early on when things were kind of sane, I wanted out. I worked for the 99 for three years and I was ready to leave after three months. Peralta and Boyle, my two original partners, felt similarly. Before the first year was up we started considering how to leave without running afoul of the employment contract given its aforementioned draconian terms. This turned out to be easier said than done.
If we had been wiser, we would have gotten jobs, waited out the non-compete, avoided the incompetent co-workers and the incoherent sales people. But we didn’t want to get a job, we wanted to start a new, non-sucky business. But new businesses require time, attention, and capital. We lacked all three, but particularly capital. On top of that it had to be in an area far away from what the startup was doing. So we pondered and planned, but we mostly procrastinated.
It’s time to introduce one last Brooklyn 99 character:
Gina Linetti: This was another investor in the 99, and like Linetti very mercurial.
And our Parks and Rec cameos:
Tom Haverford: If you’re familiar at all with the show, the match is nearly perfect. As we attempted to get out of the 99 he was someone we considered going into business with.
Jean-Ralphio Saperstein: If Haverford is a nearly perfect match Jean-Ralphio is absolutely perfect. Jean-Ralphio was Haverford’s business partner.
Pawnee: The deal my partners and I considered creating with Haverford and Saperstein.
Eagleton: The deal Haverford created with Linetti.
It happened that the Vulture took Boyle on a sales trip to Vegas. (You might say that the Vulture nested in Vegas. He was there a lot.) On this trip, Boyle would meet the technical guy on the other side of a data deal and work out how things would be implemented. What’s a data deal you ask? Well the guy on the other side of the deal had, by means both foul and fair, acquired customer information from numerous websites. These websites mostly belonged to internet gurus of one stripe or another. The Vulture was obsessed with data since he figured that was how Google made all of its money. Though true, the data we were getting could not, in any sense, be compared to the data Google was collecting, and we tried to tell him that.
In any case, the other tech guy was Haverford, and Boyle and he hit it off. In the course of talking about things Boyle mentioned our desire to leave the 99 and start something new. Haverford was convinced that with our tech talent that he could easily find some investors to start a new business. This was what we were looking for: the chance to start a new business, doing something different than the 99, with plenty of capital, and people who weren’t insane. There were many subsequent discussions, but the thinking at the time was that there wasn’t any harm in giving Haverford the go ahead to see what he could come up with.
It turned out that Haverford also had a business partner, Jean-Ralphio. I picked the character of Jean-Ralphio for a reason, he gave me a bad feeling right from the get go. He was a relentless self-promoter, constantly going on about who he knew and the deals he had made. Despite this, we figured there was no harm in seeing what they could do. The only thing we were losing was time and we had nothing but time at that point.
In the course of trying to raise money and spin up this new entity there were a lot of emails back and forth. We even had a name for the potential entity. We called it Pawnee. There were several more twists and turns, equally insane to the other things I’ve described, but too complicated to explain simply, and some of it is hearsay. But after all of that, eventually Haverford and Jean-Ralphio found an investor. That was the good news. The bad news is that it was one of the 99’s investors, Linetti. Apparently the set of connections that led to Boyle and Haverford meeting in the first place also led to the same set of investors. They decided to create a company called Eagleton.
With it being the same investor we didn’t even consider hopping to the new company. It was all too incestuous. Not only would it look bad, but the new company seemed intent on building a business closely adjacent to what the 99 had been trying to do. However, by this point the 99 had basically burned through all of its money and there seemed little prospect of raising more. But they were still paying us, there was still work to be done, and there weren’t any obviously better prospects, so we figured we’d wait around and see what happened.
In the course of landing this investor, something very consequential happened. Jean-Ralphio upset Linetti by trying to go around her to get to the actual investors in his fund. As a result of that he was cut out of the Eagleton deal.
During all of this time the Commissioner, the 99’s biggest shareholder, had been off doing his own startup. Well that startup had its IPO. That IPO promptly tanked and the Commissioner was fired, which left him free to put all of his attention into the 99. So at this point all the pieces were in place. The Commissioner was trying to salvage something out of the 99 and he replaced the Vulture as CEO. Scully, his health shattered by the perpetual stress, had left, and I had taken over the financial side of things. Haverford and Linetti were starting Eagleton but Jean-Ralphio had been kicked to the curb. If the Vulture was Darth Vader, the Commissioner was the emperor.
The Commissioner was the kind of guy who was always chasing the new hotness (as I write this he’s being sued for a crypto scam) and back in 2014 he decided that it was Wordpress plugins and services. As a result at the end of 2014 we were working on some Wordpress plugins. Every few weeks we’d get together in the conference room in the shared office space I was renting and have a progress meeting. (Fortunately, during the three long years of insanity, I had my own office in Salt Lake, while the bulk of the company was 45 minutes south of me in the Provo Area.)
On Monday, December 15th, we were scheduled to have yet another status meeting. Things had been kind of quiet but I just figured it was the holidays. Peralta, Boyle, and I were in the conference room waiting for the Vulture and the Commissioner to show up. When they did they had a young woman with them. They introduced us to her and she promptly served us with a lawsuit and a termination notice. It would be hard to overstate how shocked we were. Though we hadn’t been model employees, we'd nevertheless worked hard under ridiculous conditions. What’s more: we had been super careful to not violate our contracts. So what the hell happened?
Remember how Jean-Ralphio was cut out of the Eagleton deal? As it turns out he was beyond furious and decided he would get his revenge on Haverford and Linetti. So he went to the Commissioner and told him that Haverford and Linetti were conspiring with us to take all of the 99’s technology and give it to Eagleton. In support of this accusation he gave them all of the emails which referenced Pawnee, claiming that Pawnee turned into Eagleton. The emails obviously didn’t mention stealing tech, because we’d never even conceived of such a thing, but if you were of a suspicious mindset you could imagine that they were just the tip of the iceberg. And it’s my understanding that Jean-Ralphio swore up and down that we had said such things in person.
Beyond these accusations I’ve always thought that there was another powerful motivation for the lawsuit beyond the supposed violation of our contracts. As I mentioned the 99 was basically out of money. They’d burned through several million dollars and didn’t have much to show for it. One assumes that the investors would be pretty upset about this, but suddenly, in what must have seemed like a gift from heaven, Jean-Ralphio shows up and gives them a convenient set of scapegoats. The idea that the 99 only failed because the tech team sabotaged it sounds a lot better than squandering millions of investor capital.
The script writes itself: “Yes, it’s very unfortunate what happened, but we’re suing the people responsible and justice will be done. Of course the management team and I did everything we could, and the company would have been a success if we hadn’t been stabbed in the back.”
I expect that somewhere out there in the universe of lawsuits, there are lawsuits which are fairly painless. But most of them are Lovecraftien monstrosities which threaten not only to destroy your life, but saddle you with such deep existential doubt that you start wondering if you ever had a life. Our lawsuit was definitely in this category.
Though I can’t cover every kick in the nuts I suffered over the course of the lawsuit, I'll give you a good overview and close with a miscellaneous collection of lessons and particularly painful kicks.
In the immediate aftermath of getting sued and terminated my two partners and I each came up with different strategies to deal with being out of a job and facing an expensive lawsuit. Boyle figured he’d start a new business, Peralta, as a ridiculously gifted developer, immediately got a new job, while I vacillated between the two. Certainly my initial plan was to get a job, but I’m not a full-on programmer. My last real job had been as a server admin, and during the course of our various misadventures in entrepreneurship I was the guy who did all the things no one else wanted to. Legal, finances, project management, taxes, etc. I believe the formal term is operations… As a result I had kind of a weird resume. Another thing which militated against getting a job was my utter lack of desire to do so. I didn’t want to work for “the man” again. As such, my heart wasn’t really in it. Consequently, I decided that I would go with whatever happened first. If Boyle landed some business he needed my help with I’d do that, and if I got a job first I’d do that. Also the opening moves of the lawsuit were keeping me pretty busy.
We were three or four months into the lawsuit when Boyle landed a small amount of new business and I stopped looking for a job. In retrospect this was a pretty dumb move. Four months is not that long to be looking. Yes, my experiences hadn’t filled me with optimism about my hireability, but also I had a bad attitude. Instead of getting a job to help me deal with the twin costs of normal life and the lawsuit. I chose to do something very risky which ended up not making enough money to even cover normal life, let alone the additional cost of the lawsuit. I ended up spending two years making next to no money, in a constant state of self-doubt and anxiety. As you can imagine this was hard on my marriage, and I flirted with the idea of declaring bankruptcy, more because it would probably end the lawsuit than because I was completely out of resources. But, even so, it was definitely on the table.
So that was my professional life, or lack thereof, but what about the actual lawsuit? I should mention that Haverford, Linetti and Eagleton were all co-defendants in the lawsuit. We hoped that Linetti, as a wealthy investor, would do most of the heavy lifting and we could take a secondary role, but we were not to be so fortunate. She was useless.
On our side of things, we were interested in settling the lawsuit quickly and moving on. In fact, on that day in December we’d spent three hours in the conference room trying to convince them that Jean-Ralphio was full of it. Looking back I’m not sure if that was a mistake to talk to them for so long before we had an attorney or if it was a mistake not to talk to them more without an attorney. I wonder if we’d had a followup meeting if we could have brokered a deal right out of the gate. It’s also possible that we could have made it a lot worse. It was probably sensible to get an attorney, and I really liked the one we ended up with, but lawyers inevitably complicate things.
The first big part of any lawsuit is discovery. They give you a list of things they want to see, and you give them a list of things you want to see, and there’s a deadline for this exchange to take place. And a stern injunction not to destroy or dispose of anything. We figured a deadline was a deadline, so we had everything extracted and placed in a PDF with Bates numbering at the bottom when the deadline came. The whole process was a giant pain in the butt. Our co-defendants (mostly Linetti) and the plaintiffs kept requesting and getting extensions. Which I guess are pretty easy to get because no judge wants the trial to end on a technicality.
The original deadline for discovery ending was in March and they ended up extending things three times until the end of the year. At least the judge kept imposing stricter injunctions on them (So while she gave the plaintiffs more time to respond, they couldn’t ask us for more discovery.)
Not only did they take forever to deliver the documents we requested but I am 99% sure that they withheld some, which is of course illegal. Why am I so sure? First off there are obvious gaps. For example they claimed that there was no written communication (of the sort they would have to turn over) between the Commissioner or the Vulture and any of the other investors in the 99 during the entire time we were at the company.
Second, when pressed, their lawyer suddenly “found” a bunch of documents which were on an old computer and hadn’t made it over to his “new system”. This seems pretty suspicious. And finally, the 99 used some questionable financial practices (which I was very much opposed to) and during the lawsuit they circulated a document claiming that this was all my idea. I managed to get a hold of this document through back channels (i.e. some of the other investors gave it to Linetti who gave it to Haverford who gave it to me.) But it never appeared as part of the documents they submitted as part of discovery.
You would think that this would be game over. We’d take the document to the judge. The case would be dismissed and we’d be victorious. This is another thing I learned. It doesn’t quite work this way. (Same for the promise in writing from the Vulture that he would never sue us.)
When I talk to people about the lawsuit everyone always asks if I tried to get my attorney's fees back, if I counter-sued, or if I tried to get the plaintiffs in trouble for withholding documents. I could have done all those things, but they all cost thousands of dollars if you’re going to do them right and all of these tactics have some chance of failure. Apparently getting a single document from person A who got it from person B who got it from person C is not an incredibly solid foundation on which to file a motion. Nor is the observation that there are suspicious gaps in what they produced. Which is not to say it wouldn’t have worked, merely that it would be spending $15k we didn’t have on a coin flip and if it came up tails that money was just wasted. Another consideration we had to keep in mind was there was a real danger of pissing off the other side who had MUCH deeper pockets than us.
During this time we hoped that their delays were a sign that they weren’t interested in wasting money on the case, and that eventually they would come back to us and want to settle. The thing we dreaded the most was depositions because they’re horribly time-consuming, and as a result horribly expensive. Doubly so because if they deposed us we felt like we had to depose them. Unfortunately at basically the 11th hour, actually after the deadline our attorney had given us for when they could request to schedule a deposition, they did just that. Once again we could have protested to the judge that they’d waited till the last minute, but recall certain cost/uncertain probability point I just made. What this meant is that I ended up getting deposed between Christmas and New Year. Traditionally my extended family takes a winter vacation between Christmas and New Year at a place a couple hours north of Salt Lake. So I ended up having to leave in the middle of it. Drive back to Salt Lake and get deposed for eight hours. This was a year into things at the end of 2015.
Here’s another thing I learned: Depositions where you are the defendant are awful. If you haven’t had the pleasure, imagine the most stressful job interview you’ve ever had. Imagine that the stakes are even higher than that and that it lasts for eight hours. It was pretty bad, and I actually hadn’t really been hiding that much other than that fact that I didn’t like working at the 99, I didn’t much like the Vulture, and I wanted to be somewhere else.
It turned out to be good that we decided to depose them. This is the point when, much to our surprise, the Vulture, in his role as Darth Vader, decided to have a last minute change of heart, and metaphorically throw the Commissioner/Emperor into the abyss. As part of his deposition he said he was 90% sure we had never taken any technology, that the 99 failed due to market forces, not anything we had done, and that he thought we were great and he would love to work with us again. All things that were directly opposed to their narrative of events and the case as a whole.
Once again you would think that would mark the end of things. But it didn’t. The Commissioner was deposed a couple of weeks later and he tried to repair some of the damage the Vulture had inflicted on their case. This would have been early in 2016. A few months later they submitted a hilariously bad expert report. (It demonstrated that you could multiply numbers by percentages, and that was it. And no I’m not kidding or exaggerating.) A year after the depositions, so early 2017, they settled with Linetti and company. Somewhere in all of this, in between the Vulture’s positive testimony, and settling with the other co-defendants you would think it would be over. But no it actually languished for another year.
In order to save money we were waiting for the judge to call a status conference at which point we would push for dismissal. The alternative would be to pay a few thousand dollars to have our attorney file a motion to dismiss. But waiting for the status conference would probably get us the same thing at 1/10th the price. But the judge never called a conference. So after nearly a year of waiting we reached out to the court and that’s when we found out that it had already been technically and accidentally dismissed. See, it turned out that when they settled with Linetti, the clerk recorded that the entire suit had been settled, for all defendants not just the ones who had been party to the settlement. When we asked to see something in writing the clerk sent us three words “it’s all done”. Also the words were in lowercase, blue, and comic sans font. Which seemed like an appropriately ridiculous way to end what even our attorney described as one of the strangest cases in which he's been involved.
We notified the opposing attorney of this fact and he was incredulous. (Apparently neither he nor our attorney had ever seen a mistaken dismissal like this.) Initially he was determined to file a motion to reopen the case. But somehow reason prevailed and the Commissioner agreed that it was in fact over, and we signed a notice of dismissal with prejudice. They wanted to include a clause where we stipulated that we never stole any tech, but in the end they dropped even that. We totally won. But I’ll tell you it definitely didn’t feel like winning.
This has gone pretty long, but below are six lessons-cum-observations that are worth including which didn’t fit anywhere else.
Lawsuits are expensive. You probably knew this, but I figured I could at least provide you with my numbers. In the end we spent $90k on our attorney. I’m guessing about half was directly attributable to the depositions. During the deposition the Commissioner reported that he had already spent $250k and given that this didn’t include all or part of his deposition cost I imagine it ended up being closer to $300k or $350k.
Lawsuits are hard on friendships: Boyle, Peralta, and I are still good friends, but there were moments when I wanted to strangle Boyle. He’s a talker and an idea guy; there are few things more painful than watching someone talk at great length to your $350/hour attorney about some crazy idea that’s never going to work.
It is said that in Tsarist Russia, the serfs believed in the goodness of the Tsar, and figured it was just the ministers who were bad. That if the Tsar ever found out everything would be set to rights. We had that same idea with the Vulture and the Commissioner. We assumed the Vulture was the incompetent bad guy and that once the Commissioner came back sanity would be restored. In the end the Vulture, just by being honest, put the first nail in the coffin.
An opposing lawyer—who’s simply doing his job—may still seem like Satan incarnate. That said, truly corrupt attorneys do exist. Of the two attorneys who ended up as opposing counsel in this case, we had one who was a little bit amoral and one who was a lot amoral. I regret we didn’t have the money necessary to try to bring them to account.
Though the person with the deepest pockets doesn’t automatically win, you have to have quite a bit of money in order to not just forfeit right at the start.
Finally if I hadn’t been sued and left for two years without a real job I doubt I would have started this blog. Proving that if you look hard enough, everything has a silver lining!
The primary point of this post is to educate, but the secondary point is to make you feel sorry for me. If that worked and you’re thinking what an awful experience, what could I do to help? Well I think you know what you can do…