Ask HN: Screwed out of $12.8 million. Being Extorted. No Money for attorneys.
In 2004, I co-founded an Internet security company called Anakam. I was a programmer with some interesting ideas, and my business partner and I agreed at the time that I would receive 20%, and my partner 80% (he was financing the whole thing). We had a personal falling out in early 2005, and I left the company, always believing that my ownership was still intact. In October 2010, the company was sold for $64 million to Equifax. I found out about the sale after the fact; my partner had simply pretended that I never existed and had assumed my ownership. I am listed as the inventor on the company's first patent, which is still a key part of the company's product offerings today.
In February 2011, I sent a cease-and-desist letter to Equifax. They sent back a letter saying that they viewed my letter as an extortion attempt, and that if I did not immediately sign a settlement and and NDA that were included with their letter (without compensation), they would file a criminal complaint against me. After this, I showed my cease-and-desist letter to an attorney, who assured me that my letter was well within the law, but that their response was in fact extortion. There is a specific federal law that prohibits threatening to accuse someone of a crime unless they give you some form of consideration - in this case the outright dismissal of $12.8 million in claims. Their response came entirely out of left field, and I have not heard from them since the moment the attorney I showed the letter to told them that he believed their response was a violation of Federal extortion laws. The letter was signed by my former business partner, who was at the time still the CEO of the Anakam division of Equifax, and was, oddly enough, forwarded to me from their law firm.
I do not have the resources to pursue this matter at this time. I am told that I could have those involved in authoring and delivering the extortion letter prosecuted criminally (possibly including Equifax itself), but I have little interest in that right now.
Does anyone have any suggestions as to what I can/should do in this situation? I have come to the realization that I may never see my $12.8 million, but the extortion really added insult to injury. Any suggestions would be helpful.
You can email rr@guiyui.com if you would prefer not to post in public.
114 comments
[ 2.7 ms ] story [ 97.5 ms ] thread2) Sounds like you should seek an attorney who would be willing to take a cut if they win the case.
They also say that a civil extortion claim is the low-hanging fruit in this situation, but this particular attorney was unwilling to take it on contingency.
If I had to guess from your wording and this response, the "company" wasn't incorporated while you were involved with it? If it were, you'd have some sort of share certificate and the sale of the company may have been fraudulent. If you're a shareholder, someone else can't easily just "assume [your] ownership".
I'm guessing you never got an official 20% share of the corporation that was eventually sold, so your attorney may be thinking your beef is with the guy who "stole" your share and that could be a more complicated/less lucrative case.
At what happened to your shares at that point?
If I'm reading between the lines of your lawyer, your shares were wiped out at the time of sale? I've heard of this happening often (dilution of the common happens frequently before an IPO, for example. You can see it in the S-1s.)
Your legal rights stem from the LLC; whatever you are entitled to will depend on the exact fate of that company.
Harsh but fair: this is as it should be. Ownership based on work/effort/invention rather than invested capital is contingent on that work continuing for a LONG period. Generally these arrangements have a cliff also - so if you leave in less than 12 months your ownership is drumrole nothing. This isn't true only with startups - look at inventors in other businesses... in exchange for an idea and sample they get 1% of the royalties, it's small because sales & marketing & production are more important than the invention
It's entirely possible you have a case, but your description sounds like the prototypical ex-founder nightmare. Based on pattern-matching, you may get some cash, but nowhere near what you're saying you're entitled to have.
There's a risk though, if you have any entrepreneurial aspirations you'll burn all your future potential with the lawsuit. VCs and potential co-founders will be very wary of dealing with someone who has taken this route.
They may be willing to negotiate at that point. Of course, not a lawyer here.
Assuming everything is well timed you could have 4 guns blazing at once, which will certainly help them notice you. :)
It can be argued that the people getting scammed are partly to blame because they didn't read the fine print. I agree to an extent but I also believe that if a business wants to succeed, they should do so on honest terms.
If your case is solid you will come to an arrangement on deffered payment of fees.
Or treat this as an investment: invest $100K for a $10M return.
My personal recommendation: talk to great lawyers, they are more expensive on a per-hour basis, but when they tell opposing counsel what they think of the case, the other side usually listens. Been there, done that :-(
What state are you in? I can forward this to a California attorney I know who does business litigation on a contingency basis if you are in California, since I am living in Texas at the moment.
http://www.youtube.com/watch?v=gdXO2WgKazM
They answer some interesting questions about the process and there are obviously some advantages over a contingency arrangement (e.g. counsel gets compensation and thereby incentive to prosecute your case with all of the necessary resources). Here is the description of this program:
Step 2: Build your story. Get it clear in your own mind what happened and how you got screwed.
Step 3: Talk to the best attorney(s) you can find. Talk fast, listen well.
Step 4: Let them do what they do.
If your case is solid, most attorneys will take it on contingency, but at 12.8 mil this isn't a small town matter. You're looking at semi-pro minimum. Consider it an investment.
I personally wouldn't go anywhere alone. Maybe I've run into the wrong people-- but the wrong people know that it only costs about $5k to have someone's legs broken.
edit: which is why contingency is so important here.
20% of the founding equity rarely turns into 20% of the final sale price of the company. Normal, healthy subsequent investment could easily dilute the founding shares 2:1 or 3:1. If the company goes through especially bad times -- a near bankruptcy followed by a last-minute bailout by investors, not unheard of in the last few years -- the founding shares could easily be diluted 10:1.
Add in a modest management carve-out from the sale, and your 20% amounts to 2-5% of 90% of $64 million, or $1.2-$2.9 million.
They have refused to provide any information with regard to this at all.
For example, if the company hit a rough patch, it might have been recapitalized, with all current shareholders wiped out. Since your partner had 80% of the shares, and plenty of cash, he could have easily pulled this off.
Depending on what state you're in, you may no longer have any right to seek redress. If your partner knows what he's doing (or has a lawyer who does), the best you're going to get is a small amount of cash to go away. And if you guys are on bad terms, you may not even get that.
I haven't seen any evidence here that he even owns any shares.
Also, whoever said to sue for IP infringement may be worth listening to. 12.5M for a patent judgment is low.
Also, talk to 'grellas' here, he's one of the nicest legal eagles I've ever seen.
Pitch them with your story, if they find it solid (you can prove you claim) then you have a case and they should be interested.
Good luck
But it definitely seems like you have a strong case based on what you have described.
1. Put your story together, with paperwork and references. 2. Call some attorneys about taking the case on contingency. You have to "sell" them on the value of your case. Think of it like pitching an investor, because frankly that's what you're doing. 2a. Don't pay a retainer. I blew a lot of money with this route before focusing on a contingency arrangement. 2b. I got myself a free Westlaw trial account and searched for cases similar to mine, figuring I could find someone for whom my case wouldn't be risky for them. Also I looked for small firms so that I could talk directly to the decision maker about taking cases on contingency.
Result? 0 money invested, reasonable settlement, and closure. It took about a year. Yours will take longer likely.
Google ip attorney contingency and go from there.
I am in a similar situation, but probably around 1/10 of the amount.
As you already know, it is fairly easy to send a letter.
I am surprised they did not also accuse you of libel. That is my favorite.
Do you happen to know the federal law regarding the accusation of crime unless given consideration. Is it simply extortion or is there some other statute?
Best of luck, you have justice on your side!
Try to get some lump sum cash AND a yearly/quarterly/monthly licensing fee out of this.
At the point you and your partner had a falling out you had put in less than a year of work for the company. The other partner had invested, I can only assume, a substantial amount of money. If at that point he too had quit the company (and the shares) would have been worth absolutely nothing. I repeat: when you quit your shares were worth nothing. You could easily walk away because it wasn't your money on the line. You left the other guy in a terrible spot where he invested a bunch of money and his (technical?) partner left.
Now, the other guy spends an additional 6 years on the business and turns it into a success and now you believe you're entitled to that even though you screwed him over 6 years ago? Even though the ONLY reason that the shares are worth something now is because your partner put the effort in! That you're entitled to the same equity you would have gotten had you stayed for all 7 years? Are you kidding me? And you're publicly accusing the ex-CEO of Anakam of screwing you out of $12.8 million? It's clearly the other way around. You're trying to screw the other guy out of his money AGAIN, based on some dodgy legal footing.
That said, the company is also behaving very badly, what with the extortion thing. They would be better off making a reasonable offer, and hitting themselves on the head for screwing up their ownership / IP assignment paperwork.
Vesting usually happens over 4 years, so quitting after 1 year means 20%/4 = 5%. After accounting for dilution due to investors, other stock grants and employees grants, I doubt it can be bigger than 1-2%.
There are moral arguments to be made here, and there are standards and practices that can be applied for and against those moral arguments. But it all comes down to what was, or was not, signed on paper.
Founders should have written agreements in place, or else risk some very expensive lessons in due diligence.
Looking back, I wrote some code in 2004 and again in 2005. Assuming that said code was left intact(1), at no point in my existence would I pretend that a company was able to launch, become a going concern and grow to the point of multi-million dollar sale based on some code I wrote six or seven years ago.
(1 a completely insane assumption, imo)
If you decided to provide less than the expected amount of money, you would receive less than the agreed amount of equity, but it's really apples and oranges.
Angels routinely invest in the early-stage with the understanding that their stake will be diluted by future rounds to which they may not be invited to, or can decline to invest further in.
If you're cahooted with an early-stage angelish investor who somehow thinks their initial financial contribution to the project ultimately lead to its success and should therefore retain their undiluted equity and equally participate in the liquidation of the company, then you have other problems you need to deal with.
How do you identify these people? Usually financially unsophisticated and like to go around telling people that they are, in fact, either an owner or founder of "their startup". Some VC's have a habit of doing that as well. It's gauche.
Not without a vesting schedule and certainly not at an undiluted figure representing 20% of a company six years later.
If anything, absent contracts and documentation, OP would be lucky if he could secure an early termination fee based on the one-year, pre-money valuation of the company during which he worked. My senses tell me that said amount, if awarded, would not cover the legal fees involved.
This would be akin to Pete Best asking for a full share of the Beatles' catalog.
Refusal to take a side is just http://lesswrong.com/lw/yp/pretending_to_be_wise/.
Based on the post by the OP I consider the claim that he is entitled to $12.8 million ludicrous, and I stand by that.
Finally, I don't think that anything entitled them to attempt to extort me, or to use my intellectual property while in breach of contract.
Well that's obviously not true...
So it comes down to what papers were signed when by who and do you still have copies? If all you have as proof is "word of mouth" without any witnesses then, well, you might be fighting a lost cause.
He should figure out what he'd have if there were a 4-year vesting schedule in place and settle for that. He would get 1/4 of his partner's take if he had stayed for the entire vesting period, so if he was there for exactly 1 year, he should get 1/16 of whatever his partner got.
Here's the reality he faces, though. He's up against sleazebags who are going to try to make sure he gets $0.00 and he's going to have to fight to get anything. He needs a good lawyer. We can't help him.
Many founders do a "quickie LLC" on their own "just to get started" with the expectation that they will get a lawyer later to clean up the paperwork.
When they do this, the two classic mistakes they make are: (1) not imposing vesting requirements on grants made to founders; and (2) not requiring that founders assign all IP rights into the company in exchange for the grant.
In most cases, this becomes no-harm-no-foul and is simply cleaned up at a later stage. If there is an early falling out, though, you can have founders who leave the company and subsequently assert expensive legal claims even though their contributions to the venture may have been slight. In such a case, the do-it-yourself attempt to save a few dollars at the outset becomes a very expensive lesson in just how badly things can go wrong when you cut corners on such matters.
Don't know the facts here and am not commenting on OP's position, which might be entirely legitimate and which can only be evaluated by those who know the facts.
If that's true, is there any benefit practically speaking to having a simple e-mail that records the main points of agreement?
It's perhaps not legally ironclad, but could provide evidence of the intent of both parties.
I think there's a mental hurdle of going to the lawyer versus just exchanging a few emails.
Note a couple of points:
1. It is important that they be "contemporaneous" - after-the-fact emails that try to paint a self-serving picture do not help and can sometimes backfire.
2. It is important that they be clear. In emails, we sometimes ramble or make ill-conceived statements or simply incomplete ones, and all this can be twisted against you in any later dispute. Best advice here: be yourself and set forth the terms as you see them honestly, clearly, and in keeping with the nature of the relationship (no CYA stuff), preferably without legalese; don't document pointlessly but only as needed to add clarity to what you are hoping to achieve.
3. Watch out for "merger" clauses in any final documentation if your expressions of intent as set forth in emails are contradicted by what the final contract says. A merger clause says that the written contract sets forth the entire contract between the parties and that nothing that has previously been said or even tentatively agreed in prior exchanges between the parties is valid if it contradicts what is set forth in the final written contract. When you sign a contract that has such a clause, you will be hard put to push any contradictory interpretation that you might have previously documented in emails. The emails still matter if all they do is help interpret otherwise ambiguous expressions in the final contract but not if they contradict clear provisions of that contract. The lesson here: don't assume that, simply because you have documented something in an email, it will necessarily help you in the end.
4. Get good legal advice before signing any important contract and normally document it in a formal contract if it is at all important. If it is a smallish, then the ebb and flow and the informality of email documentation can work just fine but do be aware of the limitations of any such approach. A good lawyer will also help think through the issues and help eliminate problem areas concerning whether the contract expresses your true intent. Do not use a lawyer slavishly but use one when it matters. This is really the theme of my GP post where I essentially say be careful not to be penny-wise and pound-foolish when it comes to using legal help on things that matter.
Be careful, because "just exchanging a few emails" can be legally binding. For example, in the Stevens v. Publicis SA case [1], the owner of a PR firm sold out to a French company and stayed on as CEO pursuant to an employment agreement. Things didn't go especially well after that. Eventually the French company removed the former owner as CEO, who stood to lose out on a $4MM earn-out. The French company proposed modifying the arrangement to put the former owner in a different role, so that he would still have a shot at getting his earn-out. In the course of an email exchange on that subject, the former owner responded, "... I accept your proposal with total enthusiasm and excitement ...." The former owner later sued (on grounds not made clear in the court's opinion); the court held that the email exchange constituted a binding agreement to modify the original contract.
PS I second Grellas's comments in response to JabavuAdams.
[1] 50 A.D.3d 253, 854 N.Y.S.2d 690 (2008) (affirming judgment on jury verdict in favor of French company), http://scholar.google.com/scholar_case?case=6414256789563157...
But let me join the chorus of people saying that we don't know enough to call him "the bad guy", even if only because he may not understand why shares usually vest in the first place (if you're a first-time founder who came up with the idea, you might reasonably believe you have an iron claim to your % of the company, even if it rarely works out that way in the real world).
And for what it's worth, I think he should get some compensation for his contributions and that the counteroffer of $0 is unreasonable as well, for the reasons given by other people.
First, you have no idea what they were worth. For all we know, the company could have been profitable in its first year of business. Second, you have no idea whose fault the break-up was, and are assuming the OP is at fault. Third, if passively owning shares in a company means one is not entitled to any of the capital gains thereon, the vast majority of investors are in for an unpleasant surprise.
I can't understand the angry tone of your comments. You seem determined to assign all fault to the OP, despite his observation that the firm's first patent is still a core part of the IP. I'm guessing you're against software patents or something and are discounting the net present value of that contribution to zero, so as to argue that all value derives from the operation of the firm by the OP's ex-partner.
Patent #7,676,834 was applied for in 2004, but only granted in 2010; it's conceivable that the granting of a patent was what made it worthwhile for Equifax to acquire the firm, as opposed to its book of business. I'm not a big fan of software patents, but this one looks unusually valuable as these things are currently handled.
I see this as a thinly veiled attempt to get an internet lynch mob started. I think he chose the title of the HN post deliberately to evoke an emotional response, specifically one of outrage.
Had he obfuscated his story such that we wouldn't be able to identify the people involved I wouldn't have responded with an angry tone. He could even have kept the inflammatory title.
(FYI: I'm not particularly against software patents.)
The only thing that matters is what ownership he legally had.
Maybe they had something formal, maybe they didn't. Either way, there are laws governing how the "four D's" are handled if nothing is stipulated on paper. The four D's are death, disability, divorce (ie partners decide to separate, which is what happened here), and departing (amicable separate through pre-arranged buyout/exit terms).
In any case, let this be a lesson to everyone else to have these situations pre-contemplated and agreed to in writing :)
You can still get the benefit of Hacker News advice while keeping the parties anonymous... but by naming everyone, you open up several cans of worms (they could sue you for defamation, they could learn how you're thinking about this and what your resources are, this could get posted to TechCrunch in a way that hurts your chances of a settlement, etc.).
I believe the focus of your case (should it materialize) would be to your previous business partner. If you say and rightfully claim that there's a documented agreement (filed during the company incorporation) that you own 20% of the company, then there's a pretty good chance you may be able to get what is rightfully yours. Take note that you should be clear whether that 20-80 agreement you made before pertains to the ownership of the company, and not on particular income with which the company would be generating.
Good luck on your case and may you get what is rightfully and legally yours, so to speak.
and even more importantly how did you leave, how did you settle when you left?
there is a lot of missing details here
If you actually have $12.8M + potential damages at stake, saying "I cannot afford a lawyer" is ridiculous.
A lawyer that thinks you have a good case will take this up for a cut of the settlement no problem. If you can't find a lawyer that thinks you have a good case... it probably isn't worth suing.
Find a lawyer that can work for part of the possible winnings instead of a fee. If you have the paperwork that proves you owned part of Anakam after when you left it then, with competent lawyers, it should be just a matter of computing your share of the company's final form before it was sold to determine how much they owe you. Prepare to lose some percentage of the total to make negotiations easier and shorter, and subtract your lawyers portion off it, too.