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Silicon Valley Abuzz Over Epinions Lawsuit
Friday May 13, 12:35 am ET
Epinions Lawsuit Against Prominent Venture Capitalists Has Silicon Valley Talking


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PALO ALTO, Calif. (AP) -- An unusual lawsuit filed against several prominent venture capitalists is ruffling feathers in clubby Silicon Valley, where most financial disputes between investors and entrepreneurs are worked out in private.
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The suit was brought by three co-founders and 45 former employees and contractors of Epinions Inc., who claim they were cheated out of their share of a more than $200 million payoff when their once failing dot-com startup merged with another company called DealTime Ltd. and went public.

The renamed company, Shopping.com Ltd., continues to trade with a $395 million market capitalization. It also is named in the suit.

The venture capitalists in the dispute -- Benchmark Capital, August Capital and BV Capital Management LLC -- reject allegations they misled the former employees to convince them to give up their Epinions shares. They also say they didn't distribute false information or withhold news of a crucial deal with Google Inc., as the suit claims.

"The suit is completely without merit, and we will defend it vigorously," says a statement from Benchmark, which declined to make the general partner named in the suit, J. William Gurley, available.

According to attorney Stephen Morrissey, who is representing the Epinions employees, the suit is headed toward its first courtroom showdown on May 24, when Benchmark, August, BV and other defendants will present a motion to dismiss most of the claims. It will likely be months before the case goes to trial, if it gets that far.

The Silicon Valley venture community is already talking about the effect it could have, especially if the employees and founders, all of whom have left the company, win. Every few years, the industry faces a similar founder's lawsuit, and up to now, none have dramatically altered the way entrepreneurs and VCs do business. In the small world of venture investing, relationships are seen as too precious to risk upsetting with litigation. Founders never know when they might be back before the same VCs pitching their next company.

Some claim the Epinions suit could help change this status quo. Entrepreneurs could become more emboldened to turn to the courts when they feel cheated. And VCs, out of caution, may begin to submit decisions to lawyers for review.

The Epinions founders "are definitely trying to make a statement about the way entrepreneurs expect to be treated by investors," says Ben Smith, chief executive and cofounder of the startup MerchantCircle Inc. and co-founder of Spoke Software Inc. The suit, he says, is a "historical rarity."

The suit claims the Epinions board, including Gurley and August cofounder John Johnston, told the employees their company was in danger of going out of business as it sought their approval for a merger with DealTime. At the time, undisclosed results and projections showed growth and profits, the suit claims. They also didn't mention the Google deal, which company cofounder Nirav Tolia, who remained at Epinions, described in an e-mail a couple months before the merger as "one of the biggest wins in our history," the legal complaint states.

Tolia also is a defendant in the suit.

According to the lawsuit, approving the DealTime merger meant valuing the employees' shares in the company at zero. That's because the value of Epinions' common stock after the deal would be between $23 million and $38 million, or below the $45 million guaranteed to preferred shareholders, including the VCs, the suit claims.

Epinions co-founder Ramanathan Guha declined comment and co-founders Naval Ravikant and Michael Speiser did not response to requests for comment. BV Capital also did not return a call and Shopping.com and August Capital declined to be interview for this story.

The suit is only the most recent to pit entrepreneur against VC. 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., Credit Suisse First Boston and members of the Nishan board. Latif had accused the defendants of fraudulently buying votes to win 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 percent from 8 percent and sharply reduced their stake.





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