Ask HN: Screwed out of $12.8 million. Being Extorted. No Money for attorneys.

[downandout]

Hi Everyone,

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 [email protected] if you would prefer not to post in public.

[gizmo]

You're the bad guy in this story, and it isn't even close.

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.

[grellas]

Just a passing note here without commenting on the substance of these claims.

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.

[downandout]

I agree that he deserves credit for building it into a real business, and he has been richly rewarded for that. However, everything - the company's name, its business model, and much of its intellectual property were my contributions. A large part of its success resulted from sales of products using my technology. The personal falling out was over a woman, and I did not leave voluntarily. This company was my brainchild and I would have continued working under the worst of circumstances if allowed.

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.

[lrm242]

What would you say if this person's technology contribution was fundamental to the success of the company and, once complete, the other partner then did away with the technical mind behind the product so as to maximize benefit for himself? You have no idea what the true and complete facts are behind this guys story. Stop running around trying to apply half-baked, two-bit Valley Web-startup rules to his situation.

[davidw]

I think it's awfully premature to go around judging who is 'the bad guy', and that it's quite possible both or neither of them have done less than stellar things. But we simply don't have more than a smattering of facts from one side.

[tptacek]

I modded your comment up because it makes some important counterpoints to our usual knee-jerk "hackers good, businesspeople bad" mentality.

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).

[anigbrowl]

I repeat: when you quit your shares were worth nothing.

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.

[vaksel]

if his name is on a patent, that is part of their current offerings, he is indeed owed something

[marcf]

Does this individual have ownership of the company? What rights did he have according to the shareownership document? He may have a legal case no matter what you think of the ethics involved.

[apinstein]

How do you know? If he was a legitimate partner in the original LLC/Corporation, he may have equity rights that the other owner ignored, buried, etc. You have no idea. From his post it sounds like the founders didn't have a formal setup but had a gentleman's agreement which was ignored. It is not just "OK" to ignore a gentleman's agreement.

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 :)

[tlogan]

I think that asking for $12.8 million is a lot. However, the person is co-inventor of a patent on which business was based on, so he does have some legal ground. Or at least common sense.

[kahawe]

Totally aside from what "feels" and "seems" good or bad, the only relevant question is whether OP kept their shares or not when they left... this should be the only point they have to prove, no? And what about the patent? Was that bought or licensed from them? I think we are lacking the important details, namely what happened when they left the company and what they signed then and before.

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.

[michaelochurch]

That's what vesting is for. He's clearly not entitled to 20% of the sale price, but these people are behaving like contemptible assholes and he should get something.

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.

[brador]

Step 1: Get your paperwork in order. Find the papers that were signed, certificates given, emails sent. Gather ALL your evidence in one place/folder. MAKE A PHOTOCOPY OF EVERYTHING. Keep this separate just in case things go missing.

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.

[packetslave]

Step 1a: DON'T talk about the specifics of the case in public. You're giving opposing counsel a free head start in building their case against your arguments.

[ArbitraryLimits]

Semi-pro? How much money would it take for you to require a full pro?

[bm98]

You clearly aren't trying to be anonymous, since you named the company and your patent is easy to find. Congratulations, I guess, for being the first to patent the idea of authenticating a web app based on a password plus a cookie from a prior session, and requiring additional authentication if the cookie isn't there. Hard to imagine that that wasn't obvious in 2004, but maybe it just seems that way in retrospect.

[smoyer]

I believe the bank where I have my savings account is using this IP for their login system ... I don't know whether Equifax provides it or not. I guess the other question is whether this can be invalidated by prior art. It also seems obvious and common to me but I can't say whether it was in 2004 either.

[apinstein]

I went through a similar situation myself a long time ago, albeit for much less money.

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.

[Duff]

You need to stop posting about this on the internet and get some competent advice.

If you actually have $12.8M + potential damages at stake, saying "I cannot afford a lawyer" is ridiculous.

[ohyes]

Yup. Posting on the internet can hurt your case. Although this is interesting, I'd honestly recommend discontinuing the thread and deleting the post.

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.

[GiraffeNecktie]

Equifax is a huge corporation which is both good and bad. Bad because they've got limitless resources, good because they are a publicly traded corporation which makes them sensitive to valid lawsuits. Their business is also based on validating trustworthiness, which I think would also make them vulnerable to allegations of criminality and abuse of process. This is not a job for your typical small town lawyer. I think you need to do some research and find a big-ass New York-based law firm that knows how to find their short hairs and pull sharply.

[smoyer]

They're also likely to have other large public corporations as clients using your technology ... an injunction against using your technology until the case is settled could prove extremely embarrassing and costly to them.

[phaus]

Equifax couldn't care less what the public thinks about them. They are frequently featured on sites like ripoffreport.com They target computer illiterates by offering them a free credit report. Not long after they get the free report, these people notice that they are being charged monthly fees for services that they didn't even know they signed up for. While not technically illegal, it is highly unethical and I wouldn't be surprised if a significant portion of their income came from scamming people who don't know better.

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.

[joshuaheard]

I practice business litigation in Texas and California. It sounds like you have a great case. See if you can find an attorney who will take this on a contingency basis.

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.

[downandout]

I am in Nevada, but any litigation would likely take place in California. The company was initially based in Nevada, but was moved to San Diego (the Southern District of California for a federal matter). After the acquisition I believe their headquarters moved to Virginia, but I know they still have an office in San Diego.

[VanL]

A number of sizable and well-respected law firms will take your case on contingency if they believe that it is a good enough case and you can win. Upside is that you can get good lawyers able to help you, and if you lose, you won't be out the lawyer's fees. Downside is that if you win, you will pay a substantial percentage (30-50%) in fees, largely due to the increased risk that the firm takes on.

Also, whoever said to sue for IP infringement may be worth listening to. 12.5M for a patent judgment is low.

[saalweachter]

I suspect you are overestimating what you are entitled to.

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.

[downandout]

You are probably correct that there has been some dilution. My co-founder already had very deep pockets before we started the company, and I believe that he remained the primary investor throughout (though I am aware of 1 small round participated in by a venture firm). He would have made it a priority to dilute me out of existence.

They have refused to provide any information with regard to this at all.

[wlievens]

Still a lot of money, of course.

[kanamekun]

The first thing I would do is remove all references here to the names of the companies involved.

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.).

[davidw]

1) Do you have documentation regarding the 20% ?

2) Sounds like you should seek an attorney who would be willing to take a cut if they win the case.

[downandout]

I do have documentation regarding the 20%. The one attorney I have spoken to says, for reasons I still don't entirely understand, that I have a better shot at trying to sue them for using my intellectual property without permission, since it is quite clear that I wasn't compensated as agreed for the license to use the technology.

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.

[bond]

I'm sure you can find a lawyer who can take the case on contingency, 10-20% for the lawyer would make a nice sum...

[wglb]

Often it is more like 35% or 40%. And if there is an appeal they may go to 50%.

[alain94040]

Talk to as many attorneys as you can until you find a good one who is willing to help.

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 :-(

[gojomo]

Elsewhere in this thread you say, "the one attorney I have spoken to".

You need to speak to many attorneys. You essentially get a free 30-60 minute consultation with each attorney just by shopping around. You'll get more value out of it if you have your documentation and written timeline of events ready before the discussion. But also, you might need to talk to a few before you even realize what are the important documents and events to summarize.

Attorneys are wildly different in their competence and style and willingness to work on contingency. Each may prefer a completely different approach to the case. But almost any of them will be better able to craft a 'cease and desist', or other demand letter, than what you did yourself (and may have prompted the counter-threat via clumsy amateur language).

If you have a real case, and the stakes are as you describe, there are a lot of better places you can get legal advice than a discussion thread. Don't DIY legal notices against a giant corporation, don't improvise, don't litigate in public, don't ask amateurs for help – shop around with professionals. You could talk to dozens to lawyers, learn something new from each one, for no money out-of-pocket.

[AngeloAnolin]

Any company being sold to another company requires due diligence, especially on the legal side of matters. Equifax may have done their part in ensuring that the business they are acquiring is all good and the ownership / stakes in the company are all relevant (literally means as well that they ensured no other claimants would suddenly come up after the acquisition).

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.

[michaelrwolfe]

This is quite straightforward. You either own stock in the company or you don't.

You own stock in the company if you received shares when you founded it and/or if you received options, vested them, then exercised the shares upon leaving the company.

If you own shares, you produce the certificates, and the acquirer will buy them from you.

If you don't, you don't.

No attorney can help you if you claim to own shares in a company without actually owning any shares.

The discussion about what you "deserve" and "don't deserve" is irrelevant. You either own the shares or you do not own the shares.

[Permit]

I don't understand why you thought you could quit the whole company and still retain 100% of your assets, then come back 7 whole years later and complain that you were no longer an owner.

[m4cl4rk]

Here's a thought: Let it go. If your inspiration is the innovation at the heart of useful, life-changing technology, count yourself fortunate to have had such a meaningful impact.

Or dig in and fight like hell.

Roll up your sleeves and head to the nearest university's law library, bring some reading glasses and a tablet, dig into the germaine presiding legal code, and craft your offensive with the same fire in your belly that Erin Brokovich did when she went after the gas company.

As a matter of fact, if it's true and you find that your legal footing is indeed sound, it's a gold mine of content. Blog, book, movie. Think about it: Equifax. You couldn't pick a better black hat for a David v Goliath/ Good v Evil story. Really. The potential for intrigue and creative spin is endless. Creative non-fiction, as a genre, is one of the most lucrative in the history of story telling, publishing, theater, and film. And this story is one with an increasingly transcendent resonance at the dawn of the so-called 'contract/freelance/entrepreneur economy'. So many of us have been burned in similar ways, and it happens with such frequency, that even if a tenth of us similarly afflicted folks opted in, bought the book, and downloaded the movie, it'd likely dwarf the 13 million-dollar screwing you got.

If you go down that road, I'd ping Brokovich's consulting firm. Polish the canonball a bit, but really, get someone of that stature with that sort of direct 'man v. machine/in the belly of the beast' expertise. It could be bigger than you imagine.

http://www.brockovich.com/

Either way, thanks for the hack story. It took guts to share it, knowing that you'd likely get flamed to ashes with such a simple cheesecloth tale. Please let us know what you end up doing.

Good luck with that.

[devs1010]

Dude, if you really feel you have a case then you can find a lawyer who will take it up for you and will only take payment if they win the lawsuit, not having money for a lawyer isn't a legitimate claim unless you really have no valid case. Given that, you would probably need to pay the lawyer at least 40% of whatever you win but thats better than nothing, right?